The immunity claims made by the Australian Securities and Investments Commission relate to questions by Parliament’s Economic References Committee, which is chaired by Senator Bragg and is examining the performance of the regulator.

ASIC has told the committee it is not able to provide any information about investigations into technology company Nuix, the use of sensitive insider information by superannuation trustees to maximise their personal gain and allegations of ‘fake coal’ testing by laboratory giant ALS.

Patrick Durkin

BOSS Deputy editor

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And with Liberal senator Andrew Bragg, former ASIC chairman James Shipton and an anonymous senior ASIC executive among those lining up to sink the boot into the regulator, questions about its future are getting louder.

“It is a laughing stock. No wonder ASIC is seen as a toothless tiger,” says Bragg. “There is a major problem at ASIC. The culture of the organisation is sick.”

By: Patrick Durkin is Melbourne bureau chief and BOSS deputy editor. He writes on news, business and leadership. Connect with Patrick on Twitter. Email Patrick at pdurkin@afr.com

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The Australian Securities and Investments Commission’s own submission to the inquiry said it could not pursue every complaint but showed reports of misconduct finalised over the past decade had fallen from 25,287 in 2011-12 to 16,695 in 2021-22.

Economist John Adams, who has been scathing of ASIC, said the corporate cop’s own submission was damning because only 35 official investigations (or 33 per cent) were commenced from public reports of alleged misconduct.

“It is completely unacceptable, if not outright scandalous, that a government agency with such significant resources cannot provide a proper account of its actions and performance and yet it expects the same of companies and operators with Australia’s financial system,” Mr Adams said.

Law firm Maurice Blackburn warned ASIC’s “newfound commitment to tougher enforcement appears to have fallen by the wayside”.

The firm pointed to ASIC’s August 2021 Statement of Intent which emphasised the regulator’s desire to avoid hampering economic activity and focus on educative and cooperative aspects of its role.

“This appears to be a reversion to the kind of regulatory inaction which enabled widespread misconduct of the kind dealt with by the [Hayne royal commission],” it wrote.

The Australian Restructuring Insolvency & Turnaround Association was equally scathing in its submission and warns ASIC is “not a best practice regulator” with an enforceable undertaking not used against a registered liquidator since 2018.

“In addition to it being inefficient and lacking transparency, it has failed to promote a turnaround culture in Australia,” ARIA said.

“Its failure to adopt a rigorous risk-based approach means that too much money is being spent on reporting that is not even considered by ASIC and too little enforcement action is being brought against directors who are rorting the system.”

The Chartered Accountants Australia and New Zealand joined other stakeholders in complaining that ASIC has too much on its plate and needs to be broken up.

“ASIC has a very large remit, which seems to grow with each passing year,” it said. “We consider that it may be timely for the government to consider whether ASIC should be restructured to better handle this increasing remit.

“We consider that ASIC is not able to apply its resources efficiently to undertake proportionate investigations and enforcement action and remove bad actors from the economy.”

The Australian Institute of Company Directors also agreed.

“ASIC’s remit is extensive and appears broader than any other similar conduct authority globally,” it said.

“The AICD considers that changes to ASIC’s governance structure could improve accountability, performance, culture and strategic oversight.”

Former ASIC chairman James Shipton – who has given evidence as part of a Treasury investigation into the conduct of deputy ASIC chair Karen Chester – has also made a submission and agrees that ASIC should be broken up.

The Australian Financial Review revealed the Morrison government came close to breaking up the corporate regulator under the former chairman Mr Shipton, after Treasury investigated the idea when it was raised in the final recommendations of the Hayne royal commission.

“A separate civil enforcement and prosecutorial agency that would take serious actions referred to it by ASIC, APRA and, perhaps, other regulators should be considered,” Mr Shipton recently said.

ASIC chairman Mr Longo is preparing to implement the largest restructure of the regulator in 15 years from July 1, designed to streamline enforcement, cut bureaucracy and deliver fast decision-making.

By: Patrick Durkin is Melbourne bureau chief and BOSS deputy editor. He writes on news, business and leadership. Connect with Patrick on Twitter. Email Patrick at pdurkin@afr.com

Source: https://www.afr.com/policy/economy/asic-s-enforcement-record-completely-unacceptable-20230319-p5cte3

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In the past two years, Australian economic policy makers have unleashed the most radical economic stimulus agenda in the history of Australia due to the COVID-19 pandemic which commenced in early 2020.

This economic stimulus agenda has led to:

• sharp rises in household and government spending funded by surging private sector credit growth and ballooning public sector debt;

• booming asset prices (especially real estate prices); and

• the highest levels of officially recorded inflation in two decades.

This agenda, coupled with the Russian invasion of Ukraine (which has led to higher oil and gas prices in particular) has resulted in cost-of-living pressures becoming the most pressing economic and political challenge facing Australia. This challenge was a major factor for the defeat of the Morrison Government in the Federal Election held on 21 May 2022.

In response, the Reserve Bank of Australia (RBA) has begun the process of attempting to rein in inflationary pressure through a campaign of contractionary monetary policy. This campaign has included to date:

• ending quantitative easing (QE) in February 2022;

• raising the official cash rate by 25 basis points to 0.35% in May 2022 – the first increase in the official cash rate since November 2010; and

• announcing the commencement of quantitative tightening (QT).

Extraordinary Monetary Stimulus

According to the RBA[1], the RBA’s COVID-19 monetary stimulus package included:

• lowering the official cash rate to from a pre-pandemic level of 1.5% in the first half of 2019 to 0.1% by November 2020;

• reducing the interest rate of Exchange Settlement balances to 0%;

• implementing the Term Funding Facility (TFF), which led to Australia’s commercial banks borrowing $AUD 188 billion at 0.1% from the RBA, as opposed to accessing financial capital from the domestic and international wholesale capital markets;

• the purchasing of Australian Government Securities (AGS) (i.e., federal government bonds) and State and Territory Government securities (STGS) to support market function which occurred between 20 March 2020 and 6 May 2020 to the tune of $AUD 51.3 billion;

• launching yield curve control (YCC) on 20 March 2020, which focused on controlling the yield on certain 3-year Australian Treasury bonds, namely the April 2023 AGS until 20 October 2020 and then the April 2024 AGS thereafter to the tune of $AUD 29 billion (note that YCC between from 19 March 2020 to 3 November 2020 was targeted at 0.25% and from 3 November 2020 thereafter was targeted at 0.1%); and

• QE (i.e., purchases of AGS and SGTS across the yield curve) in three tranches to the tune of $AUD 223.7 billion of AGS and $AUD 57.0 billion in STGS from November 2020 to February 2022.

It is these policies, coupled with extraordinary fiscal policy (by the Commonwealth and State/Territory governments) and the war in Ukraine, which have led to highest level of official recorded inflation at 5.1% which was released by the Australian Bureau of Statistics on 27 April 2022.

Monetary Contraction and Quantitative Tightening

In light of surging inflation, with the April 2022 unemployment rate recorded at 3.9% (the lowest level in seasonally adjusted terms since 1974[2]) and robust year-on-year growth of 3.3% to the end of March 2022, the RBA commenced its monetary contraction campaign in May 2022, as outlined above.

The RBA’s QT program, according to its Assistant Governor, Dr Chris Kent, commenced in May 2022 and will consist of:

• allowing Commonwealth and State/Territory government bonds that were purchased under the bond buying program (i.e., bonds purchased to support market function, YCC and QE) to mature and thus naturally run off the RBA’s balance sheet (as opposed to actively selling the bonds); and

• requiring Australia’s commercial banks to repay the financial capital lent under the TFF.

With respect to the:

• former, $AUD 2 billion worth of such AGS and STGS will mature in July and November 2022 respectively, $AUD 13 billion in 2023 and approximately $AUD 35 and $AUD 45 billion thereafter; and

• latter, approximately $AUD 85 billion is due for repayment in 2023, with the remaining $AUD 103 billion due in 2024, specifically by 30 June 2024.

The full extent of the RBA’s QT program is illustrated in Diagram 1[3].

Diagram 1: The RBA’s intended QT program

It is important to note that while the QT program is modest in 2022, the RBA has signalled that its monetary contractionary campaign will be conducted primarily through the raising of its official cash rate. At the time of writing, market analysts are expecting that the RBA Board will further raise its official cash rate at its June 2022 meeting between 0.25% and 0.4%.

Economic Effects of Monetary Contraction and Quantitative Tightening

The economic impact of the RBA’s proposed monetary contraction and QT program is to drive up the cost of capital for economic agents (including Australia’s Federal and State/Territory Governments) across the economy.

Specifically, the QT program will drive up the funding costs for Australia’s commercial banks, which would be required to pass these costs onto their customers through higher interest rates across their lending products.

The effects of these higher funding costs would dampen credit growth and slow the Australian economy, independent of the increases in the RBA’s official cash rate.

Given that the main components of economic growth in the March 2022 quarter were household and government spending, the total effect of the monetary contraction campaign (both the official cash rate and the QT program) will be to severely dampen household and government consumption through a higher cost of credit (provided governments offset their higher interest costs with recurrent expenditure cuts elsewhere).

It remains unclear as to how much the RBA will raise its official cash rate in 2022 - from record low levels - and by the RBA’s own admission[4], what the impact on households will be given record levels of household debt.

Nevertheless, according to the current monetary contraction campaign laid out by the RBA, while the market expects a number of increases in the official cash rate in 2022, it is arguable that the bulk of the monetary tightening campaign will hit in 2023 and 2024, with the repayment of $AUD 188 billion of TFF financial capital and the roll off of $AUD 51 billion in AGS and STGS from the RBA balance sheet.

These potential impacts and their timing will have profound ramifications as to how and when and to what extent, the Australian economy will adjust.

Anti-deflationists oppose Monetary Contraction

While the RBA’s monetary contractionary campaign is still in its infancy, anti-deflationist economists have already begun to warn, through the Australian mainstream media, of the dangers of such a campaign.

For example, Alex Joiner, chief economist at IFM Investors, published in the Australian Financial Review[5] on 29 May 2022 that a significantly tightened monetary policy from here is likely to lead to a fall in household consumption and thus lower aggregate demand and economic growth given that indebted households will be forced to use more of their disposable income to service debt rather than be able to consume (or save) as much.

This shift, Joiner argues, could be triggered as households fall into negative equity with falling real estate prices.

Given these set of dynamics, Joiner argues that the RBA must temper its monetary contractionary ambitions and give due consideration to economic growth and financial stability.

However, what neither Joiner nor the RBA have yet to accurately articulate is the extent to which a monetary contraction can be implemented before such a contraction becomes a major drag on the economy and threatens financial stability.

Given the uncertainty surrounding this question, forecasts and forward guidance offered by government officials (included by the RBA) should be taken with heavy qualification.

The Disingenuous QT Program

The ultimate question which economic agents across the Australian economy should consider is whether the RBA and the new Albanese Government have the resolve to fully implement their monetary contractionary campaign.

While the new Federal Treasurer, the Hon. Jim Chalmers MP, has confirmed the independence of the RBA, the Albanese Government has an important role to play in ensuring the viability of the RBA’s agenda.

Any major QT program, as foreshadowed, will drive bond yields higher as the supply of AGS and SGTS increases in the secondary market. This will raise interest costs payable by all governments within Australia, particularly the Commonwealth.

To mitigate this impact, a significant and material fiscal consolidation would be required to limit an increase in supply of government bonds. Ideally, delivering a budget surplus will give the Australian Government the ability to purchase AGS, which can roll-off the RBA’s balance sheet and thus mitigate the likely interest rate effects of the QT program.

While the new Federal Treasurer has committed to delivering a new budget in October 2022, major fiscal consolidation does not appear to be a likely feature.

Thus, given that financial stability remains the cornerstone of economic public policy, this column argues that the RBA’s monetary contractionary campaign is likely to face major headwinds as its impact is felt by households, small business and governments across Australia.

The likely adverse and material impact on these sectors will likely prevent the RBA fully executing on its program and thus requiring a pause and ultimate reversal. Such a capitulation would render, at the very least, the RBA’s current QT program to be disingenuous.

It is for these reasons that the RBA Assistant Governor Dr Kent foreshadowed the possibility of a new QE program into the future via his recent speech. Specifically, Dr Kent said (emphasis added):

“Third, should a bond buying program be needed in the future to provide support to the economy, it would be likely to be more effective if sales are avoided this time around. Setting a precedent of sales in the QT phase of the current program could reduce the effectiveness of a given value of any future bond purchases. That's because the effect of those purchases on bond yields and the exchange rate would arguably be lessened if the market anticipates a fast run down of holdings next time around. In short, the market would probably assume ‘once a seller, always a seller.”

Conclusion

After unleashing the largest and most extraordinary monetary stimulus campaign in Australian history, Australia’s economic policy makers are now faced with the impossible task of attempting to rein in surging inflation at the time they are attempting to prevent financial instability and Australia’s record debt bubble from collapsing.

To date, the RBA has ended its QE program and begun the task of raising its official cash rate at the same time as announcing their QT program.

While the QT program is of an insufficient size in 2022, it will be of a material size in 2023 and 2024, especially when Australia’s commercial banks have to pay back the financial capital that was borrowed under the TFF.

The effects of QT, coupled with rising official interest rates, will have a significant impact on market interest rates and on the real Australian economy – especially heavily indebted households. Left unchecked, this impact is likely to result in a deflationary spiral that could threaten financial stability and the solvency of Australia’s commercial banks.

Given that economic policy makers are not willing to accept this outcome, Australian economic agents can expect, at some point, a pause to the monetary contractionary campaign and ultimately see a reversal back to monetary easing, which will likely require or entail a recommencement of QE.

As such, the RBA’s QT program is both fake and disingenuous and will be ultimately proven to be so in the months and years ahead.

John Adams is the Chief Economist for As Good As Gold Australia

[1] https://www.rba.gov.au/publications/rdp/2022/pdf/rdp2022-02.pdf

[2] According to the original unemployment data series, unemployment also reached 3.9% in July 2007.

[3] This diagram was drawn from a speech given by the RBA’s Assistant Governor, Dr Chris Kent, on 23 March 2022 titled: “From QE to QT – The next phase in the Reserve Bank's Bond Purchase Program”. See link here: https://www.rba.gov.au/speeches/2022/sp-ag-2022-05-23.html

[4] See the May 2022 minutes of the RBA Board - https://www.rba.gov.au/monetary-policy/rba-board-minutes/2022/2022-05-03.html

[5] https://www.afr.com/policy/economy/aggressive-interest-rate-tightening-could-trigger-housing-crash-20220526-p5aor7

During this period, extraordinary monetary and fiscal stimulus in response to the COVID-19 pandemic, supply chain disruptions as well as the Russia-Ukraine war has resulted in explosive, multi‑decade record levels of official rates of inflation, leading to many economies experiencing stagflation.

As a result, the prices of commodities, real estate, public-listed shares and cryptocurrencies have seen significant increases (consistent with the wealth effect), although these assets have witnessed a dramatic pullback during April-May 2022 as major central banks, such as the US Federal Reserve, have begun to tighten monetary policy through the lifting of official interest rates.

However, during the same period, the price of silver has been effectively capped at $US 30 per troy ounce, primarily trading between $US 22 - 28 per troy ounce as shown in Diagram 1.

Specifically, since the commencement of the COVID-19 pandemic, where the price of silver reached a low of $US 11.63 per troy ounce on 16 March 2020, silver has only approached $US 30 per troy ounce on two occasions – that being $US 29.63 on 3 August 2020 and $US 30.09 on 1 February 2021.

Diagram 1: Silver Market Price Chart (2018 – 2022)[1]

Given the:

• current macroeconomic context;

• geo-political conditions; and

• the price action experienced in non-precious metals commodities

the silver price action during 2020 - 2022 strongly suggests prima facie evidence of market manipulation. Importantly, this new evidence adds to the body of market manipulation evidence as outlined in the January 2020 article “The Undeniable Manipulation of the Silver Market”[2]and the May 2020 article “COVID-19 exposes gold and silver price manipulation”[3].

Specifically, the former article points out the key fact that silver has yet to surpass its January 1980 high, expressed in Australian dollar terms, even though Australia has witnessed an explosion in its money supply from January 1980 to December 2019 by approximately 2,600% while the above‑ground stock pile of silver grew by just 94.2% over the same period.

Silver Market Manipulation

Importantly, real world examples exist which strongly suggest that manipulation of the silver market occurs across the entire supply chain and pricing structure, including:

• the physical market (i.e., wholesale market, major institutional holdings such as central banks (e.g., Bank of England) as well as the retail market);

• the Over-the-Counter (OTC) markets (i.e., London, United Kingdom); and

• the futures derivatives exchanges (i.e., Comex, United States of America).

A diagrammatical illustration of the silver market, which encompasses both the physical market and the pricing structure is demonstrated in Diagram 2[4].

Diagram 2: Global Physical Silver Market

Such real-world examples of manipulation in precious metals markets include:

• settlement of a class action lawsuit in December 2021 to the tune of $US 152 million by multiple financial institutions (including Barclays Bank PLC, Scotiabank, Société Générale, and the London Gold Market Fixing Ltd) to end claims that they illegally fixed prices on the gold market[5] (noting that Deutsche Bank and HSBC settled similar claims in 2016[6]);

• JP Morgan found guilty and fined $US 920 million in 2020 by the US Department of Justice for manipulating precious metals markets via the practice of ‘spoofing’[7][8];and

• Morgan Stanley settling a $US 4.4 million class action in 2007 for failure to purchase and store physical silver on behalf of investment clients[9].

Market Manipulation - Emphasis and Analysis

Within the English-speaking world, discussion and analysis of precious metals market manipulation is dominated particularly by American and Canadian analysts.

These analysts tend to place significant emphasis on the futures market (i.e., the COMEX and its regulator, the Commodity Futures Trading Commission (CFTC)) at the expense of focusing on manipulation practices within the physical market.

Such overemphasis is understandable given that:

• the COMEX and the CFTC are American institutions; and

• some Comex data is made public, whereas there is little available data of physical OTC trading and storing (ETFs, pools, certificates, etc).

Nevertheless, manipulation within the physical market, which includes fraudulent fractional reserve and rehypothecation schemes (including leasing/swaps, etc), are of critical and material importance.

The market effect of such scheme is to artificially expand the supply of silver and thus contribute to price suppression.

Moreover, at the heart of these physical market manipulation schemes are a lack of integrity in:

• product quality (i.e., fake or diluted bars (e.g., bullion bars which are not at least 99.9% pure));

• storage custodian services (which includes unallocated and pool-allocated products); and

• audit quality.

Traditional Precious Metals Analytical Model

Importantly, the existence of multiple forms of market manipulation renders the conventional forms of precious metals analysis redundant.

For the overwhelming majority of economically trained analysts, precious metals analysis proceeds according to the following phases:

• Phase 1 - central bank prints fiat currency (either physical or digital units of currency);

• Phase 2 - this leads to inflation and currency devaluation;

• Phase 3 - this leads to economic agents shifting capital from fiat currency to assets which act as a store of value (primarily precious metals);

• Phase 4 - this shift of capital generates additional investment demand for precious metals; and

• Phase 5 - additional investment demand drives the price of precious metals higher ceteris paribus (i.e., all other things remaining equal).

In particular, this investment demand price driven model (as described above) has been promoted aggressively by precious metals (including silver) market commentators/analysts on alternative platforms such as YouTube, and particularly by those who are linked to retail bullion dealerships and other related precious metals businesses (including financial institutions who offer precious metals related investment vehicles).

These analysts have an inherent conflict of interest given that:

• investment demand price driven model encourages bullion sales as investors believe that their purchase contributes to investment demand and ultimately higher prices; and

• they typically draw remuneration via commissions on bullion sales.

Nevertheless, to test whether this model reflects real world events within the silver market, both the price behaviour as well as data from the physical market need to be considered.

Market data from the Silver Institute (as shown in Table 1 below), demonstrate that:

• Industrial silver demand was the highest on record in 2021 (508.2 million troy ounces) and is projected to reach a new high in 2022 (539.6 million troy ounces);

• retail silver investment demand in the form of bars and coins in 2021 (278.7 million troy ounces) and forecasted for 2022 (279.2 million troy ounces) are the highest since 2015;

• while net investment demand via Exchange Traded Products (ETPs) reached a record in 2020 (at 331.1 million troy ounces), net ETP demand in 2021 and forecasted for 2022 remain positive (i.e., net inflows) at 64.9 and 25 million troy ounces respectively, although slowing; and

• the global physical silver market experienced a net annual market balance deficit in consecutive years of 2019 (63.4 million troy ounces), 2020 (258.1 million troy ounces) and 2021 (116.7 million troy ounces) and is projected to experience another net annual deficit in 2022 (96.5 million troy ounces) when factoring in all forms of industrial and investment (retail and ETP) demand.

These facts paint a strong fundamental picture for why the price of silver should have risen over 2020 – 2022 consistent with other commodities such as base metals, energy and agricultural goods.

Table 1: Silver institute’s Global Silver Market Data[10]

However, when considering both:

· data from the Silver Institute; and

· the silver price behaviour of 2020 – 2022;

the conventional model of precious metals markets analysis from both a broader macroeconomic as well as microeconomic market perspective does not reflect real world events – meaning that increased silver demand during an inflationary period does not necessarily lead to a higher silver price. Thus, an alternative explanation of how the silver market operates is now required.

Alternative Market Thesis

While, as noted above, fraudulent derivative trading practices (such as spoofing) do exist and can play a significant role in how price is manipulated via the COMEX, fractional reserve and rehypothecation (via leases/swaps, etc) schemes that materially distort the real state of the physical market also play a significant role.

In contrast with the traditional (5 phase) analytical model outlined above, major systemic fraud in the physical market results in investment demand having little influence on market price.

For example, if an additional $US 1 billion of investment demand for physical silver entered the market, but this investment was not actually backed by physical silver (even if the investor believed it to be), then this flow of fiat currency capital would have little to no effect on market price (as supply is assumed to have, in effect, automatically and equally responded, regardless if true or not – and without the credible threat of objective oversight/audit and penalty by independent authorities).

Thus, a reasonable, alternative explanation regarding the dynamics of the silver market suggests that the silver price is driven more by investment supply (i.e., real changes in supply) and not so much in investment demand (or the extent to which investment demand is actually backed by physical silver bullion).

In the most extreme case, infinite fractional reserve supply (i.e., supply of silver bullion which physically doesn’t exist) renders investment demand completely irrelevant as a price influencer.

New Approach to Rectifying Silver Market Manipulation

If systemic manipulation of the silver market is acknowledged - both within the derivative and physical markets - the question then becomes: what is the appropriate mechanism in order to best address this manipulation and restore the market back to its natural demand and supply forces?

Unfortunately, given the inherent political and legal difficulties of seeking redress in countries such as the United States of America and the United Kingdom (given the potential involvement of both governments in precious metals market manipulation), retail investors, analysts and commentators have little prospect of overcoming institutional resistance and market inertia in:

• Washington DC (CFTC/DOJ);

• New York (COMEX); or

• London (OTC Market and the Bank of England).

Thus, there is little hope that market manipulation can be tackled by attempting to expose and end the corrupt market practices at the futures derivatives market (i.e., COMEX) by market participants such as the Bullion Banks and those regulators who are charged with governing them such as the CFTC (i.e., the top-down approach).

Rather, the only available strategy to address manipulation of the silver market is through a bottom‑up approach that seeks to address instances of fraud and rehypothecation in the physical market. This includes unallocated and pool-allocated schemes offered within the retail market to retail investors (e.g., the Perth Mint).

Exposure and rectification of such fraud and rehypothecation will shrink supply from the “market‑understood” quantity of supply to the “actual” quantity of supply.

Importantly, there are reasonable grounds to assume that there are sufficient levels of fraud and rehypothecation within the physical silver market to have a material impact on the function of the silver market and thus the silver price set by the COMEX and the OTC market.

Addressing physical market fraud and rehypothecation schemes will ultimately put pressure on the OTC market and futures exchanges and will ultimately drive price higher when major markets and exchanges get raided for physical silver in similar fashion to what happened to nickel at the London Metals Exchange in March 2022.

Ideally, what is required is exposure of a sizeable fraud or rehypothecation scheme in the physical silver market to cause a sufficient number of market participants to trigger a rush of redemptions which would expose other similar schemes across the world.

Such an event would likely guarantee that the price of silver will break through the current $US 30 per troy-ounce price ceiling towards the upside.

Conclusion

From all the objective evidence available, it is now quite obvious that the price behaviour within the silver market over the past two years (2020 – 2022) makes little market or economic sense instead, market manipulation offers a more compelling explanation.

Despite historical attempts to address such manipulation, all previous attempts (especially those involving large financial institutions – i.e., the bullion banks) have either failed or resulted in cash settlements with no admission of wrong-doing, thus providing little incentive for market participants to alter their behaviour.

Rather, in order to effectively address market manipulation, what is required is a paradigm shift in approach and execution.

This article argues that the only salvation for silver investors is to expose fraud and rehypothecation schemes within the physical market which, in turn, exerts pressure on derivative exchanges via a bottom-up approach.

Exposure of a sufficiently large scheme that proves scandalous is likely to trigger an international chain reaction that expedites the process of squeezing derivative futures markets and manifesting in a higher, less manipulated, silver price.

John Adams is the Chief Economist for As Good As Gold Australia

[1] Source: https://silverprice.org/

[2] https://www.adamseconomics.com/post/the-undeniable-manipulation-of-the-silver-market [3] https://www.adamseconomics.com/post/covid-19-exposes-gold-and-silver-price-manipulation [4] This diagram was sourced from the John Adams article, “The silver market fast approaches breaking point”. See the following link: https://www.adamseconomics.com/post/the-silver-market-fast-approaches-breaking-point [5] https://www.gata.org/node/21570 [6] See footnote 5. [7] Spoofing according to the US Department of Justice means: “In tens of thousands of instances, traders on the precious metals desk placed orders to buy and sell precious metals futures contracts with the intent to cancel those orders before execution, including in an attempt to profit by deceiving other market participants through injecting false and misleading information concerning the existence of genuine supply and demand for precious metals futures contracts”. https://www.justice.gov/opa/pr/jpmorgan-chase-co-agrees-pay-920-million-connection-schemes-defraud-precious-metals-and-us [8] https://www.nasdaq.com/articles/jpmorgan-to-pay-%24920-mln-fine-for-manipulating-precious-metals-treasury-market-2020-09-29 [9] https://www.reuters.com/article/idUSN1228014520070612

[10] https://www.silverinstitute.org/silver-supply-demand/

As noted in the April 2020 article Australia has been economically destroyed within 4 weeks[1], the Australian policy establishment in response to the COVID-19 pandemic unleashed the largest fiscal and monetary policy stimulus package in Australian history.

This policy response was in large part an attempt to prevent Australia’s record household debt bubble from collapsing as a result of escalating delinquencies and defaults, which would have occurred resulting from:

• the general global decline in economic activity resulting from a collapse in economic confidence and international supply chain disruptions; and

• specific Australian COVID-19 restrictions including the policy of lockdown in the absence of economic stimulus.

This consequently would have led to the collapse of Australia’s banking and financial system when delinquencies and defaults reached critical mass, thus resulting in Australia experiencing the largest economic depression since 1892.

Nevertheless, the unleashing of this Australian policy response, which coincided with other foreign government and central banks who implemented similar policy responses, led to the manifestation of stagflation in 2020[2] and then subsequently ‘accelerated stagflation’ in 2021[3].

In the Australian context, this manifested itself particularly in sharp rises in the prices of property and, to a lesser extent, financial assets such as shares and crypto currencies.

This latter point can be demonstrated by analysing the growth in capital city property price indices as published by CoreLogic. Table 1 shows the growth in Australian capital city property prices from 1 January 2020 to 24 January 2022.

Table 1: Growth in Australian Capital City Property Prices – Core Logic

As demonstrated by Table 1, the extraordinary economic stimulus related to the COVID-19 led to an average increase of approximately 24% across Australia’s five capital cities.

Further granular analysis (as has been conducted by property analysts such as Martin North of Digital Finance Analytics (DFA))[4] of the Australian property market demonstrates that growth:

• in house prices materially outstripped movements in the price of apartments; and

• regional city property prices outstripped property prices in capital cities.

Impact of Australian Monetary Policy

Within the Australian context, the bottom-line effect of extraordinary economic stimulus has been stagflation and accelerated stagflation via the evermore expansion of credit and accumulation of debt by both Australian households and businesses (especially households).

For example, as illustrated in Diagram 1, data from the Reserve Bank of Australia (RBA) shows that the economic turmoil resulting from COVID-19 in 2020 led to a sharp fall in the Australian household debt to income ratio from 186.7 to 179.5, however extraordinary fiscal and monetary policy measures led to a sharp rise (claw-back) in the Australian household debt to income ratio to 184.6 by September 2021.

Diagram 1: Australian Household Debt to Income

Importantly this data:

• includes unincorporated small-to-medium businesses (SMEs); and

• does not include buy-now, pay-later financial products which have not been deemed as ‘credit’, but have been embraced by a significant number of Australian consumers.

Extraordinary monetary policy measures such as:

• lowering the RBA’s official cash rate to 0.1% and the interest rate payable to exchange settlement accounts (i.e., commercial bank reserves held at the RBA) to 0%;

• quantitative easing (QE) – centred on RBA purchases of Australian and State/Territory government bonds (irrespective of the yield);

• Yield Curve Control (YCC) – artificially controlling the yield of Australian Government bonds of terms out to and including April 2024 to only 0.1%; and

• the provision of the Term Funding Facility which by June 2021 amounted to $AUD 188 billion of funding to Australia’s commercial banks over 3 years to mid-2024 at 0.1%

have also led to interest costs faced by Australian households falling to their lowest levels on record (the RBA data series started in March 2017).

This can be shown in Diagram 2, which shows the ratio of Australian household interest payments to income being at its lowest level since the start of the sharp rise in household debt and property prices in the late 1990s at just 5.2% for September 2021.

Diagram 2: Australian Household Interest Payments to Income

Extraordinary monetary policy measures in Australia can also be seen in the sharp rise in annualised credit growth for housing which is demonstrated in Diagram 3.

Diagram 3: Australian Credit - 12-Month Housing Growth

In Diagram 3, annualised credit growth can be seen growing from 3% in September 2019 to 7.1% in November 2021, the highest rate of annualised credit growth since March 2016. The bulk of this growth was seen among those owner-occupier borrowers (as shown in Diagram 4) as opposed to real‑estate investor borrowers (as in Diagram 5).

Diagram 4: Australian Credit – 12-month Owner Occupier Growth

Diagram 4 shows annualised credit growth among owner-occupiers grew to 9.3% in November 2021, up from the low of 4.4% in August 2019. The rate of annualised credit growth among owner‑occupiers was the highest since February 2010.

Diagram 5: Australian Credit - 12-month Investor Housing Growth

Diagram 5 shows annualised credit growth among investors grew to 3% in November 2021, up from the low of -0.6% in July 2020. The rate of annualised credit growth among investors was the highest since January 2018.

It is important to note that this phenomenon is not purely a function of extraordinary macroeconomic stimulus, but is also partly a function of Australia’s strict COVID-19 immigration policy.

As outlined in the published July 2021 article, The Radical COVID-19 transformation of the Australian Labour Market[5], Australia experienced a net outflow of particularly young immigrants (both visitors and residents) from February 2020 to June 2021 leading to both middle aged (35-44 years old) and older Australians (55 years+) both re-entering the labour force as well as securing both part and full‑time work.

This, according to the Australian Bureau of Statistics (ABS), lead to a fall in Australia’s unemployment rate (as measured by the ‘original’ series) from 5.7% in January 2020 to 4.8% in June 2021 to only 4.0% in December 2021.

Nevertheless, what is concerning is that the significant growth in property prices (as well as credit issued and debt accumulated) during the COVID-19 pandemic has also resulted in an even greater concentration of lending by Australian ADIs to Australian households (i.e., the non-government and non-business sectors) as shown in Diagram 6.

According to data from the RBA, November 2021 saw that 58.7% of total lending issued by Australian ADIs was lent to Australian households, the highest recorded in the data series dating back to 1990.

Diagram 6: The percentage of Australian Bank Lending to Persons

It is important to note that if both unincorporated and incorporated SMEs that have been capitalised by household borrowing (such as mortgages) is also taken into account, then the percentage of ADI lending to Australians household would be higher than the recorded 58.7% as noted in Diagram 6 above.

Australian Household Mortgage Stress

Disturbingly, the COVID-19 pandemic and its related drastic policy measures such as lockdowns and border closures (both domestic and international) have resulted in a sharp and sustained increase in financial stress including both mortgage stress and rental stress, despite the provision of extraordinary stimulus and the decline in unemployment (particularly for older Australians).

As noted in Diagram 7, data from DFA shows that Australian mortgage stress rose sharply from 32.7% in December 2019 to peak at 42.4% in September 2021 and has now fallen to 41.8% in December 2021.

Moreover, despite a temporary decline in rental stress during 2020 from approximately 40%[6] in April 2020 to 34.8% in October 2020[7] resulting from direct stimulus payments and rent relief during the COVID-19 lockdown, rental stress according to DFA has risen back to 40.53% as of December 2021[8].

Despite falling interest costs as noted above, rising mortgage and rental stress is a function of stagflationary forces such as:

• lower disposable income resulting from COVID-19 related restrictions (notably in specific affected sectors);

• larger mortgages driven by the psychological phenomenon of the Fear of Missing Out (FOMO) which in part triggered higher property prices;

• higher household living costs from items such as basic groceries, utilities, insurance, transport (fuel) and childcare; and

• negative real wages growth (i.e., nominal wages growth lower than inflation).

Diagram 7: Australian Mortgage Stress (Digital Finance Analytics)

Normalisation of Monetary Policy?

Both globally as well as for Australia, rising inflation resulting from extraordinary fiscal and monetary stimulus during the COVID-19 response has led to:

• some central banks tightening monetary policy such as Brazil[9], New Zealand[10] and Russia[11]; and

• added speculation that other central banks would normalise monetary policy by curtailing or ending quantitative easing programs as well as raising official cash rates – especially given that officially recorded inflation has proven to be persistent and not just transitory.

This latter point is particularly pertinent to the United States, given that annualised inflation for 2021 there reached 7% according to the US Bureau of Labor Statistics’ (BLS’) Consumer Price Index[12] (CPI) and 9.7% according to the BLS’ Producer Price Index[13].

This latter point also has relevance in the Australian context given that inflationary pressure here has also proved to be persistent in 2021 as measured by the ABS’ CPI outlined in Table 2.

Table 2: Quarterly and Annualised Australian Official Inflation (Australian Bureau of Statistics)

For now, the RBA Board through its February 2022 monetary policy announcement has indicated that its bond buying QE program will end on 10 February 2022[14].

The RBA Board has further indicated that underlying inflation (as measured by the ABS’ CPI) will need to be comfortably within the 2% - 3% range for consecutive quarters after the ending of the QE program prior to the official cash rate being lifted from the current 0.1%.

Importantly, the full normalisation of Australia’s immigration policy to a pre-pandemic posture will, if it eventuates, likely dampen (currently emerging) wages growth through reversing the transformation of the labour market as noted above via expanding labour supply.

The extent of this phenomenon in 2022 may delay any normalisation policy implemented by the RBA board.

Policy Normalisation Limitations?

Despite this latter factor, if the RBA’s forward policy guidance is to be believed it signals that the process of monetary policy normalisation in Australia still has some time to play out.

However, the more important point to note is that given the sharp rise in household indebtedness as well as mortgage and rental stress during the COVID-19 pandemic means that the scope for monetary policy normalisation is limited.

Any moves to normalised monetary policy would, while slowing the rate of inflation, lead to:

• increased financial stress among highly indebted households;

• slower credit growth resulting from higher costs in borrowing financial capital; and

• a reversed wealth effect through lower asset prices such as real estate and financial assets, leading to lower levels of household consumption and confidence.

The combination of these effects would be lower rates of economic growth and higher rates of unemployment that could potentially manifest into a downward-spiralling deflationary cycle.

This phenomenon would, if allowed to advance unabated, threaten:

• the current valuation of Australian real estate;

• the solvency of Australian households resulting from falling disposable income and rising delinquencies; and

• the stability of Australia’s financial system and by extension the Australian macroeconomy (especially given the concentration of Australian bank lending to the household sector) if a critical mass of households were to default on their debt and interest repayment obligations.

Importantly, given the scale of Australia’s household debt bubble, a combination of these effects would have the potential to manifest into the largest economic depression in Australian history in the absence of policy interventions.

Such an economic depression would threaten the current stranglehold of political, financial and social power by Australia’s ruling establishment including:

• Australia’s parliamentarians (i.e., the political elite);

• Australia’s economic institutions (i.e., Treasury, RBA and the Australian Prudential Regulation Authority (APRA) – the bureaucratic elite); and

• Australia’s major banks (i.e., the banking/financial elite).

Thus, it is primarily the consequences to existing political, economic and institutional power which places a natural limitation as to the pace and extent to which Australian monetary policy can be normalised.

Such considerations are also relevant for other nations who have both:

• extraordinarily accommodative fiscal and monetary policy settings; and

• materially significant amounts of households, corporate or public sector (government) debt.

APRA – Zero and Negative Nominal Interest Rates

Importantly, while ordinary Australians were distracted in 2021 with COVID-19 lockdown restrictions and related vaccine mandates, APRA on behalf of the Australian Government was quietly putting in place the policy and operational foundations for zero or negative nominal interest rates (NNIRs) to be implemented in Australia.

For example, in December 2020, APRA:

“…wrote to all regulated entities regarding their preparedness for zero and negative interest rates and requested entities with material readiness issues to advise the nature of the issues and the timeframes for rectification/mitigation.“[15]

Moreover, in July 2021, APRA initiated a consultation process with Australian Deposit-taking Institutions (ADI) in relation to the regulator’s draft expectations for zero and NNIRs[16].

In its communications to Australian ADIs, APRA stated that zero and NNIRs were a possibility either directly through official policy set by the RBA or through pricing by financial markets. APRA indicated that Australian ADIs needed implementable tactical solutions if these events were to occur.

This consultation process was followed up with operational guidance outlining APRA’s final expectations, which was published on 28 October 2021[17]. Among APRA’s final expectations is the expectation that:

• ADIs will develop tactical solutions by 31 July 2022 for customer accounts in excess of $AUD 10 million; and

• such solutions can be implemented within 3 months if required (i.e., by the end of October 2022).

The foreshadowing of NNIRs in Australia is a significant development from both an economic and public policy perspective. It marks an important new sign post as to the likely direction of monetary and prudential policy in Australia over the coming medium term, irrespective of whether Australia experiences an external economic shock such as a new global financial crisis.

The introduction of a negative nominal official cash rate in Australia, based on international experience, does not necessarily mean that retail banking products will also yield a NNIR. But it does mean that retail banking products such as mortgages will likely charge retail borrowers a lower rate of interest than what current policy settings allow.

In practicable terms, given that Australian variable and fixed mortgage rates in 2021 were in the range of 1.8% - 2.4%, the introduction of NNIRs, especially by the RBA Board in the context of the official policy rate, is likely to result in Australian ADIs offering mortgage rates well below this range.

Conclusion

The COVID-19 pandemic has caused significant political, health, economic and social disruption to Australia and the world-at-large.

To prevent Australia’s record debt bubble from collapse, Australian policy makers unleashed the largest economic (particularly fiscal and monetary) policy stimulus package ever in Australian history. This, coupled with extraordinary economic stimulus around the world, led to the manifestation of acute inflationary pressure via stagflation.

Within the Australian context, rapidly growing household debt levels - through the expansion of household credit - has led to both a sharp rise in property prices and residential rents as well as financial stress, in particular mortgage and rental stress.

Any attempt to combat stagflationary forces through forward policy guidance and monetary policy normalisation has only limited scope, given the potential that such action would likely to an uncontrollable downward deflationary spiral and threaten the stability of Australia’s financial and banking system, risking Australia plunging into our largest economic depression since 1892.

Given the limited scope, tokenistic policy normalisation manoeuvres in Australia are likely in 2022 and 2023 which could include (among other measures):

• the ending of the RBA’s QE (or bond buying) program; and

• a modest lift in the RBA official cash rate which, however, will likely remain lower than the pre‑pandemic official cash rate of 1.5%.

But once these tokenistic manoeuvres dampen economic activity (especially via lower credit growth and consumption) and lead to higher unemployment (noting that Australia’s international borders are likely to reopen back to pre-pandemic levels in 2022 which will lead to higher overall labour supply and thus higher unemployment among older Australians and slow wage growth), the RBA will inevitably begin another gradual loosening monetary policy

campaign potentially as early as 2024.

In a debt-driven economic growth model, this campaign will require levels of economic stimulus beyond current levels which is very likely to encompass NNIRs. In such circumstances, retail mortgage (and other debt product) lending rates – both variable and fixed - are likely to be lower than during the 2020 and 2021 COVID-19 pandemic.

Alternatively, if a major external economic shock were to occur any time from January 2022 onwards, Australian policy makers would, in order to prevent an economic depression, have little/no choice but to adopt extreme macroeconomic policy measures in rapid fashion. These are likely to include even deeper NNIRs and thus even lower mortgage (and other debt product) interest rates.

Thus, in both of these circumstances, lower mortgage rates (say at 1%) will increase the capacity of Australian households to borrow even greater levels of credit on a short-term myopic cashflow basis. It will thus likely send Australian property prices and associated rents to even higher stratospheric levels.

This process of stagflation and ultimately hyperinflation can and will continue to manifest until economic policy makers make a conscious decision to embrace deflationism (i.e., tight fiscal and monetary policy or resetting the currency by either introducing a new revalued currency or backing the existing currency to something of tangible value say physical gold (i.e., the gold standard)).

This ultimately means consciously risking the collapse of the financial system and thus the existing Australian and international political and financial power establishment structure.

No evidence is available that suggests that Australia’s political and financial power establishment structure have either kamikaze or suicidal tendencies and thus hyperinflation of Australian property over the medium term remains the most likely central scenario.

John Adams is the Chief Economist for As Good As Gold Australia

[1] https://www.adamseconomics.com/post/australia-has-been-economically-destroyed-within-4-weeks [2] https://www.adamseconomics.com/post/can-central-banks-save-the-largest-debt-bubble-in-world-history [3] https://www.adamseconomics.com/post/accelerated-stagflation-now-in-full-swing [4] Watch the Walk the World YouTube video, The Property Predictions Crystal Ball is Cloudy: https://www.youtube.com/watch?v=jQuVIi3S57I

[5] https://www.adamseconomics.com/post/the-radical-covid-19-transformation-of-the-australian-labour-market

[6] https://www.youtube.com/watch?v=CIi2ayGjyeM [7] https://www.youtube.com/watch?v=_I_vtMZhzl0 [8] https://www.youtube.com/watch?v=AMeYA4THkMg [9] https://www.reuters.com/world/americas/brazil-central-bank-makes-150-bps-interest-rate-hike-despite-recession-2021-12-08/ [10] https://www.abc.net.au/news/2021-11-24/rbnz-rba-interest-rates-hike-house-prices-wages-employment-banks/100646272 [11] https://www.reuters.com/markets/europe/russia-raises-key-rate-sharply-85-its-highest-since-2017-2021-12-17/

[12] https://www.reuters.com/world/us/us-consumer-prices-increase-strongly-december-2022-01-12/ [13] https://www.reuters.com/business/us-producer-prices-exceed-expectations-november-2021-12-14/ [14] https://www.rba.gov.au/media-releases/2022/mr-22-02.html [15] https://www.apra.gov.au/consultation-on-zero-and-negative-interest-rates [16] See footnote 15. [17] https://www.apra.gov.au/operational-preparedness-for-zero-and-negative-interest-rates

These experts have, in the past 21 months, taken centre stage in Australian scientific and public policy circles as the COVID-19 pandemic has taken over and dominated the Australian national consciousness including all areas of economic and social life.

In particular, these experts have played an instrumental role in formulating scientific and public health advice primarily through epidemiological statistical modelling and forecasting regarding the delta variant outbreak in NSW from June to October of 2021.

As noted in the article, “Australia’s greatest public policy disaster since 1915”[1], Australia’s entire pandemic management response has been based on a critical series of scientific assumptions – principal among them is the primary infection model by which COVID-19 infects and spreads through human populations.

Conventional scientific thinking and the very elementary basis of modern epidemiological knowledge is that viruses and bacteria spread through a human population primarily through a person to person (P-P) infection model.

This belief led to analysis, forecasts and policy recommendations which sought to limit the movement of Australians through policies such as lockdowns, social distancing as well as interstate and international border closures.

Alternatively, dissenting scientists, such as Sir Fred Hoyle, Chandra Wickramasinghe and Ted Steele, believe that while P-P viral infections do occur, the primary infection model, especially during pandemics, are derived from an atmospheric source otherwise known in the scientific literature as ‘miasma’[2].

These scientists believe that miasma provides a more scientifically robust explanation for the observed infection phenomena during the current pandemic which has also been documented in previous pandemics such as the Spanish Flu pandemic of 1918-19 or the European bubonic plague of 1346 ‑1353[3].

In the coming weeks as the Australian state of New South Wales (NSW) emerges from its current lockdown, NSW is likely to provide a critical test as to which group of scientists was more accurate in their analysis of COVID-19 as rates of COVID-19 cases, hospitalisation and ICU admissions are watched closely.

For those scientists and public health officials who believe that P-P is the primary infection model for COVID-19, they emphatically forecast that COVID-19 cases, hospitalisation and ICU admissions will rise in NSW in the coming weeks as people mobility increases, resulting from the removal of lockdown restrictions.

Alternatively, scientists who subscribe to the miasma theory believe that COVID-19 cases, hospitalisation and ICU admissions in NSW are likely to fall as COVID-19 viral loads continue to dissipate in the community after an initial atmospheric viral in fall burst prior to the epidemic outbreak observed during June 2021.

It is without question that if the predictions of conventional epidemiologists and infectious disease experts play out to be wrong in NSW, adhoc new justifications which lack both empirical and/or clinical evidence (such as warmer temperature, higher UV levels, less vitamin D3 deficiency, less sharing of entrained/dormant indoor air, more outdoor breathing/airway flushing or high vaccine coverage) will be offered to explain away why their analyses and forecasts have not played out.

In this situation, it will be critical for the future integrity of science and pandemic management that Australian policy makers reflect on the possibility that the entire scientific establishment may have assumed the wrong primary infection model for COVID-19, despite repeated warnings from dissident scientific research groups.

If this is indeed the case, the scientific, as well as possibly the legal, consequences may be profound, given the extent of public harm which restriction of movement policies have caused millions of Australians, particularly in the states of NSW and Victoria.

NSW Premiers Berejiklian and Perrottet

It is without question that the highest levels of NSW’s political leadership have been influenced both by epidemiologists and infectious disease experts and their scientific advocacy of the P-P infection model as COVID-19’s primary infection transmission mechanism.

In recent weeks, both former NSW Premier Gladys Berejiklian and current NSW Premier Dominic Perrottet have made a series of statements which are consistent with mainstream epidemiological thinking and modelling that COVID-19 cases, hospitalisation and ICU admissions will rise, potentially quite dramatically, as NSW relaxes various lockdown restrictions at double dose vaccination thresholds of 70%, 80% and 90%.

For example, at her press conference of 20 September 2021, former NSW Premier Berejiklian made the following statements (emphasis added):

“October will be the worst month for people who pass away and the people who require intensive care. No matter what is happening in terms of the vaccination rate or anything else, that is the likely scenario.”

“We also have to accept that, once we start reopening, cases will go through the roof, but it won’t matter as much because people will be vaccinated.”

“We need to know that come October there will be weeks when our system will be technically overwhelmed, but the plans are in place.”[4][5]

These expectations were endorsed by NSW Premier Perrottet at his press conference of 9 October 2021[6] where he stated:

“Naturally we will see as NSW opens up, case numbers increase and hospitalisation increase – it is a natural part of opening up.”

Premier Perrottet reiterated these expectations at his press conference of 18 October 2021 when he stated:

“We would think that in the next couple of weeks as mobility increases across the state, as restrictions are lifted, case numbers will increase and that will be a challenge, that will be a challenge for our state, but our health system is very strong and obviously we will expect hospitalisation to increase as well… this is not over, we have a long way to go.”[7]

Epidemiological Forecasts for NSW

Critically, the statements made by NSW Premier’s Berejiklian and Perrottet as documented above are not only derived by mainstream epidemiological theory, but also from specific epidemiological modelling and forecasts, coupled with associated policy advice in which their respective governments received from:

• their own departments and officials such as NSW Health;

• epidemiological and infectious disease academics employed by academic institutions; as well as

• private sector scientific and medical research institutes.

Importantly, many epidemiologists and their emphatic forecasts of rising COVID-19 related cases, hospitalisation and ICU admissions in NSW have not just been provided to the NSW Government through confidential advice but have been stated on the public record across many public platforms.

A range of these emphatic forecasts are detailed in Table 1.

Table 1: Epidemiological Forecasts for NSW

These statements could not be clearer as to the mainstream scientific epidemiological expectation of what will occur in NSW in the coming 4 – 8 weeks as Christmas and the new year of 2022 approaches.

It is important to note that these statements and forecasts as captured in Table 1 above were made by professional scientists in the full knowledge that NSW:

• has very high and rising rates of COVID-19 vaccine coverage; and

• will experience warmer weather as the spring season (i.e., September-October 2021) turns into summer (i.e., December 2021 – January 2022).

No Structural Break in first 9 days in NSW’s COVID-19 Cases, Hospitalisation and ICU Data

Importantly, and perhaps to the surprise of many conventional observers, NSW has experienced a sustained fall in COVID-19 related cases, hospitalisation and ICU admissions, consistent with the trend patterns first established in mid-September 2021, in the first full nine days since the first major relaxation of COVID-19 lockdown restrictions which occurred on 11 October 2021.

This can be demonstrated in Diagram 1 which graphically represents the count of daily new COVID‑19 infections as per official NSW Government data as published daily by NSW Health.

Diagram 1: COVID-19 Daily Cases in New South Wales as of 8pm, Tuesday, 19 October 2021

This phenomenon is also true when accounting for fluctuations in daily testing rates as illustrated in Diagram 2.

Diagram 2: Rate of positive COVID-19 tests in New South Wales as of 8pm, Tuesday, 19 October 2021

Moreover, this phenomenon is also true for COVID-19 related hospitalisation in NSW as illustrated in Diagram 3 as well as ICU admissions as illustrated in Diagram 4.

Diagram 3 specifically shows that there are fewer citizens in NSW hospitals as a result of COVID-19 from the peak of 1266 hospital admissions which was reached on 21 September 2021. Alternatively, Diagram 4 shows that COVID-19 related ICU admissions have continued to decline from the peak of 244 which was reached on the same day as peak hospitalisation on 21 September 2021.

Diagram 3: COVID-19 related hospitalisation in New South Wales as of 8pm, Tuesday, 19 October 2021

Diagram 4: COVID-19 related ICU Admissions in New South Wales as of 8pm, Tuesday, 19 October 2021

Debunking Conventional Analysis

What is clear from these graphs above and the official NSW Government data which underpins them is that a whole host of forecasts and statements that suggested high rates of hospitalisation and ICU admissions for October 2021 to date have been dead wrong.

Additional time, in the order of several weeks, is required to assess whether other scientific and epidemiological analyses, forecasts and statements that have been made to date for the period of November – December 2021 are accurate and if not, why not.

Importantly as warned above, university academics have already offered alternative rationales for why epidemiological forecasts made for October 2021 have been demonstrably inaccurate.

For example, Professor Jamie Triccas and Dr Megan Steain from the University of Sydney[21] on 14 October 2021 offered two specific rationales for why epidemiological forecasts have been wrong to date including:

• an underestimation of vaccine effectiveness citing recent studies that AstraZeneca and Pfizer offer protection between 94% - 96%; and

• protection in ‘real time’ meaning that rapid take-up in NSW “ensured there was a large proportion of recent vaccines within the population”­­ – meaning that NSW during the period of July – October 2021 did not experience “waning vaccine immunity”.

Unfortunately, these justifications appear to be untested assertions which do not have any clinical or epidemiological evidence to support them. Moreover, these rationales do not consider the possibility that the assumed underlying infection model may be completely wrong.

Conclusion

Current developments in NSW carry a critically important message – that real world science carries real world consequences.

From June 2021 to October 2021, the NSW Government implemented some of the most extreme and extraordinary public health measures in Australian history in order to mitigate the public health risk posed by the Delta variant of COVID-19.

The majority of Australia’s scientific experts are now on the public record making extraordinary forecasts as to what would and will happen in NSW as the state emerges from lockdown. Their forecasts are based on a series of elementary epidemiological assumptions, central among them is that COVID-19 transmits primarily through a P-P infection model.

Dramatic and demonstrable deviations from their centralised forecasts cannot be explained away by the current COVID-19 vaccination campaign, given that international evidence from countries such as Israel and Singapore exist and shows that countries with 80% double dose vaccination rates experienced dramatic explosions in daily COVID-19 cases and related hospitalisation of patients.

Importantly, official COVID-19 related data in NSW nine days after the first relaxation of lockdown restrictions has not seen a structural break in NSW’s official health data reflecting an explosion in daily cases, hospitalisation and ICU admissions.

Rather, the existing declining trend which commenced in mid-September 2021 has continued unabated.

Scientists, policy makers and concerned citizens are now closely waiting whether the underlying science which underpinned totalitarian pandemic management was based on sound or flawed and misguided science.

The implications for the long-term credibility of Australia’s scientific community cannot be overstated.

John Adams is the Chief Economist for As Good As Gold Australia

[1] https://www.adamseconomics.com/post/australia-s-greatest-public-policy-disaster-since-1915 [2] Importantly, as noted in the article “Australia’s greatest public policy disaster since 1915” (see footnote 2), miasma has a long tradition in European epidemiological and medical thinking. This is also true in Chinese epidemiology has noted by Ted Steele – see following link: https://www.youtube.com/watch?v=Ijc4mjiIquk [3] See Hoyle F., and Wickramasinghe C., (1979), “Diseases from Space”, J.M. Dent and Sons Ltd, United Kingdom [4]https://www.abc.net.au/news/2021-09-20/nsw-records-935-covid-19-infections-and-four-deaths/100475524 [5] See the following video via the following link between time stamps – 1 minute 13 seconds to 1 minute 45 seconds, 14 minutes 50 seconds to 15 minutes 7 seconds and 18 minutes to 20 minutes and 20 seconds: https://www.youtube.com/watch?v=nHIDZ2SDM9U [6] See the following video via the following link between the 13 minutes 50 seconds to 14 minutes 50 second time stamp: https://www.youtube.com/watch?v=eyPLKYs8nJ8 [7] See the following video via the link between 13 minutes to the 14 minutes 9 seconds time stamp on: https://www.youtube.com/watch?v=ZCWe1bN0QXo&t=813s

[8] https://www.themandarin.com.au/163308-modelling-indicates-more-sydney-siders-should-keep-their-distance-to-control-covid-19/ [9] https://www.skynews.com.au/australia-news/coronavirus/nsw-government-modelling-suggests-covid19-hospitalisations-to-peak-at-over-3400-in-october/news-story/b282074caa6d1c5b23648be90e099acb [10] https://www.theguardian.com/australia-news/2021/sep/06/nsw-covid-cases-could-peak-at-2000-a-day-premier-says-as-state-records-1281-infections-and-five-deaths [11] https://ozsage.org/media_releases/modelling-of-nsw-roadmap-to-freedom-icu-capacity-for-the-delta-epidemic-2021/ [12] https://7news.com.au/lifestyle/health-wellbeing/new-south-wales-modelling-shows-hospitalisations-could-be-double-initial-predictions-c-4052706 [13] https://pursuit.unimelb.edu.au/articles/nsw-should-be-okay-opening-up [14] https://www.theaustralian.com.au/breaking-news/covid19-nsw-university-of-sydney-modelling-claims-state-could-hit-40000-cases-a-day-without-restrictions/news-story/45bccf3d6c5836212c55f142a3b083f9 [15]https://www.afr.com/policy/health-and-education/cases-will-rise-as-nsw-opens-the-question-is-by-how-much-20211011-p58yyx [16] See Footnote 15

[17] See Footnote 15

[18] https://www.theaustralian.com.au/science/modelling-gets-nsw-covid19-hospitalisations-peak-wrong/news-story/628d9c06e9e205384d1dd66dbb8bbdb4 [19] https://www.news.com.au/world/coronavirus/australia/australia-covid-news-live-cases-new-freedoms-and-vaccinations/news-story/3b779a08723519d5364b570fd8126e69 [20] https://www.triplem.com.au/story/nsw-cases-dip-amid-covid-uncertainty-as-the-state-reopens-188569 [21] https://theconversation.com/why-sydneys-covid-numbers-didnt-get-as-bad-as-the-modelling-suggested-169368

This is particularly true of Australia where some of the most extraordinary and extreme public policy decisions have been made during the course of 2020 and 2021, some of which will have long-term detrimental generational impacts – especially as it relates to economic policy.

Millions of Australians have been shocked by the totalitarian decisions of the governments of New South Wales (NSW) and Victoria in particular which, without exaggeration, have deployed policies and tactics that are literally similar to the fascist and communist regimes which existed in 20th Century history.

The people of Australia were repeatedly told that:

• lockdowns;

• mask and vaccine mandates;

• house arrest under the guise of ‘self-isolation’ or ‘home quarantine’;

• state border closures;

• the suspension of civil and political rights;

• the inability to earn an income;

• deployment of the Australian Army; and

• police brutality (including the use of counter-terrorism resources)

were necessary and justified given the risks posed by COVID-19 – especially the “delta variant”.

To a large degree, a significant proportion of Australian citizens accepted and acquiesced to these policies given that they accepted the risk profile to public health as promoted by:

• mainstream scientists (especially epidemiologists and infectious disease experts);

• senior health bureaucrats (especially Chief Medical and Health Officers);

• political leaders;

• leading media and celebrity personalities; and

• relevant associated interest groups (such as business groups and trade union associations).

However, this assessment regarding the lethality of COVID-19 was not universal within the international scientific and medical community.

Indeed, as noted in the article, “Australia has been economically destroyed in 4 weeks”[1], which was published in April 2020:

• modelling controversies;

• questions regarding the accuracy of reverse transcription polymerase chain reaction (RT-PCR) testing; and

• observable data with respect to asymptomatic cases

suggested that the public health risk and potential lethality posed by COVID-19 was far lower than promoted by mainstream established political, scientific and medical authorities.

As the world has moved into the second-half of 2021, significant scientific and medical discoveries and insights with respect to COVID-19 have been uncovered which raise new questions as to the virus’ nature and how it should be managed.

These discoveries and insights raise new questions as to whether Australia’s management of COVID‑19 to date was justified and whether the current policy road map moving forward is appropriate.

As Australia (in particular NSW) moves forward to opening up its economy and society, it may well come to light that key scientific and medical assumptions which were at the centre of Australia’s policy approach were misguided and erroneous and thus the public policy response was dramatically both inappropriate and disproportionate.

If this is the case, the conclusion will be that the economic, social and psychological costs endured by the Australian people, in particular the people of NSW and Victoria, constitute an unparalleled unmitigated disaster on a scale not seen in Australian public administration since the catastrophic Gallipoli military campaign of 1915.

Importance of Virus Origination and Infection Model

To determine whether the management of the COVID-19 pandemic has been appropriate and proportionate, important linkages between the origin of COVID-19 and how it infects human populations need to be determined.

This is critical to understand given that such linkages lead to important assumptions being made that form the basis of a wide sweep of public policy responses.

Australian scientists such as molecular immunologist Ted Steele[2] and his international group of research scientists, who have written extensively about the COVID-19 pandemic, believe that a comprehensive understanding of the infection model (i.e., how a virus infects and spreads throughout a human or animal population) is critical to determining the appropriate public health policy response.

In a recent public video, Steele stated[3] that any scientific hypothesis relating to COVID-19 must be able to both:

• comprehensively explain observed infection patterns; and

• accurately predict how COVID-19 is likely to behave in the future.

Moreover, Steele believes that a scientific understanding of the infection model of a virus cannot be divorced from the virus’ origins, given that the virus origin will provide important clues as to its molecular and genetic composition and how it behaves in general as well as in specific environments.

Defining the infection model of how a virus behaves becomes the basis for the formation of epidemiological modelling, which is then used to forecast the impact on public health if:

• no pandemic mitigation measures or controls are implemented; as well as

• certain mitigation measures or controls are implemented.

Such epidemiological modelling scenarios and forecasts then become the basis of designing and implementing the public policy response necessary to mitigate any public health risks posed by any virus.

The relationship between these linkages is outlined in Diagram 1.

Diagram 1: Relationship between the COVID-19 Infection Model and Public Policy Response

What is important to draw out from Diagram 1 in the context of both COVID-19 and Australia is that, if Australian epidemiologists and infectious disease experts have misunderstood the infection model of the COVID‑19 virus, then the subsequent epidemiological modelling and public policy response will be flawed – potentially by a materially significant degree.

Under such conditions, affected interest groups such as businesses and citizens may experience significant and irreversible net financial and non-financial costs.

Observed Virus Infection Patterns

Importantly, the nature of how viruses (including coronaviruses and Influenza) and bacteria infect human and animal populations has been subject of much scientific, medical and even theological discussion throughout history across multiple civilisations, empires, dynasties and geographies given the myriad epidemics and pandemics of our past.

Over the course of the past 700 years in Europe particularly, two prominent theories have been put forward regarding how viruses and bacteria spread. These theories include:

• a person-to-person (P-P) or animal-to-person (A-P) infection model; and

• a miasma (or atmospheric) infection model.

Interestingly, and as noted by Hoyle and Wickramasinghe (1979) in their seminal book, “Diseases from Space”[4], medieval European doctors subscribed to the miasma theory:

“Yet medieval doctors had no such thoughts. It was their overwhelming view that the pestilence had its origin in the air – ‘poisoned’ air was the widely favoured explanation.”

Alternatively, as noted by Hoyle and Wickramasinghe, it was doctors from India who first subscribed to the P‑P/A-P infection model:

“The first definite reference to plague occurs in the Bhagavata Purana, an Indian medical treatise written in the fifth century. There is a clear warning for people to leave their houses ‘when rats fall from the roofs above, jump about and die.”[5]

While the P-P/A-P infection model has, as noted by Hoyle and Wickramasinghe, become an ‘axiom’[6] in epidemiology, advocates of the miasma infection theory were still prominent during the 19th Century such as British epidemiologist Charles Creighton.

Again, as noted by Hoyle and Wickramasinghe:

“As recently as 1894 the distinguished British epidemiologist Charles Creighton, maintained that influenza was not an infectious disease. Citing medical opinion during the epidemic of 1833, 1837 and 1847, which held that the disease affected the entire country during the same one or two weeks, Creighton suggested that influenza was due to a ‘miasma’ spreading over the land rather than a disease that must spread by passing from person to person.”

It is within this context that COVID-19 must be critically considered and assessed. This is especially so given that the primary COVID-19 origination theories include:

• Theory 1 - COVID-19 originated from animals such as bats or pangolins;

• Theory 2 - COVID-19 originated from the Wuhan Institute of Virology – either deliberately or accidently leaked - as either ‘gain of function’ or biological weapons of mass destruction research; or

• Theory 3 - COVID-19 originated from an asteroid which struck the atmosphere above central China on 11 October 2019 (this theory is known as panspermia).

Specifically, a series of reported phenomena that have been observed during the current pandemic remains unexplained by conventional scientific explanations. These phenomena include:

• dramatic and sudden exponential growth of COVID-19 cases in particular cities and countries along the 40-degree latitude line in the Northern Hemisphere including Wuhan (China), Qom (Iran)[7] (approx. 19 February 2020[8]), Lombardy and Veneto (Italy) (approx. 25 February 2020[9]) and New York City (USA)[10] (approx. from 1 March to 22 March 2020)[11];

• on deck ship crew who tested negative for COVID-19 before they left port and who had no interactions with other ships at sea suddenly became struck with COVID-19 within a 24 - 48 hour period[12] - specific examples include the Diamond Princess, Grand Princess, USS Theodore Roosevelt and the Al Kuwait[13];

• humans on isolated islands becoming struck with COVID-19 as was the case with Chilean O’Higgins Army Outpost in Antarctica where most of the personnel were struck down suddenly and simultaneously with COVID-19 in late Dec 2020[14];

• the observance of COVID-19 mystery cases (i.e., COVID-19 infection cases that cannot be attributed to an originating patient) as observed in the case of Victoria, Australia[15];

• COVID-19 case counts that largely reflect symmetrical bell curves irrespective of public health interventions such as social distancing, lockdowns, mask mandates, deployment of vaccines, etc[16]; and

• the observance of ‘null zones’ – geographical areas and cities such as Hobart, Adelaide or Perth in the case of Australia which have not experienced rapid surges of COVID-19 daily infections during the course of the current pandemic.

Importantly, such patterns as described above have been observed in previous epidemics and pandemics throughout recent centuries. As noted by Hoyle and Wickramasinghe[17], in the case of the “Black Death” in Europe, isolated and remote villages in England were struck by the bubonic plague, while continental European cities such as Nuremberg, Milan and Liege were relatively untouched.

Hoyle and Wickramasinghe also noted that, in the context of the 1918-19 Spanish Flu pandemic, Alaska’s isolated villages were struck by a large outbreak of Spanish Flu in November/December 1918 despite their primitive modes of transportation (sleds and dogs) and that birds had already flown south given cold temperatures emanating from the onset of the winter season. Specifically, Hoyle and Wickramasinghe noted:

“The rapid spread of influenza across the frozen wasteland of Alaska in November/December 1918 remains a mystery on the basis of person-to-person transmission. With a population of 50,000 people very thinly spread over an area the size of Europe and with ground transportation essentially impossible, the only route of viral transfer must have been through the air.”

Moreover, Hoyle and Wickramasinghe also noted that, during the 1918-19 Spanish Flu pandemic, some isolated ships at sea (prior to the establishment of the global commercial aviation industry) were also suddenly struck with outbreaks of Spanish Flu:

“In other words, the passengers and crews of many ships at sea, totally isolated from infected persons, quite suddenly were afflicted whereas others were spared.”

Doherty Institute Modelling

Importantly, in the Australian context, the public policy response pursued by the Australian Government as well as the State and Territory Governments has been driven by modelling produced by the Melbourne-based Doherty Institute.

This modelling was dubbed by Australian Prime Minister Scott Morrison as the “National Plan”[18] and has been endorsed by the so-called “National Cabinet”[19] (a committee consisting of the Prime Minister and all State Premiers and Chief Ministers).

The National Plan involves a 4-stage road map which seeks to restore Australia to a pre-pandemic economic environment that is open to the world.

The essence of the plan is for Australian policy makers to implement draconian lockdowns where outbreaks of COVID-19 occur in order to “suppress” community COVID-19 transmission.

Such lockdowns are based on the premise that the infection model of the COVID-19 delta variant is based on rapid P-P community transmission.

Under the Doherty Institute modelling, the implementation of such lockdowns would continue until certain vaccination coverage thresholds are met sufficient for the Australian economy and society to unlock and open-up as safely as possible, assuming low levels of COVID-19 infection cases.

The basis of the Doherty Institute modelling is that once an Australian state or territory opens up, COVID-19 cases would rapidly increase as people mobility increased, however high vaccination coverage is assumed to ensure that mass severe illness or death resulting from COVID-19 would be contained or minimised.

Shockingly, in producing its modelling for National Cabinet, the Doherty Institute made no specific assumptions about the origins of COVID-19 and did not attempt to reconcile its model to the observed phenomena as mentioned above.

Expectations in NSW

Importantly, it is the P-P infection model assumed by the Doherty Institute which has shaped the epidemiological modelling produced by the NSW Health Department and the cautious 3-phase opening roadmap of the NSW Government.

As outlined by the former NSW Premier Gladys Berejiklian at her 20 September 2021 press conference[20], the opening up of NSW at vaccination thresholds of 70%, 80% and 90% are expected to result in new COVID-19 cases going “through the roof” and subsequently leading to the NSW Health system being "technically overwhelmed" with increased COVID-19 related hospitalisations and ICU admissions.

This expectation was also reiterated by NSW’s new Premier Dominic Perrottet in his press conference held on 9 October 2021[21].

Importantly, such is the concern of what opening up NSW may mean to public health that Nowra based Surgeon, Professor Martin Jones, went public on 7 October 2021 to state that “thousands of people” could potentially die in NSW directly from ending the COVID-19 related lockdown restrictions[22].

Similar concerns have also been expressed by the NSW President of the Australian Medical Association[23] as well as prominent Australian epidemiological academic professors, such as University of Melbourne Professor Anthony Blakely and Burnet Institute Professor Mike Toole, as reported by journalist Finbar O’Mallon in the Australian Financial Review on 11 October 2021[24].

Contrary Data

Critically, the European country of Norway has displayed an infection pattern which is at odds with the modelling from the Doherty Institute and NSW Health.

On 25 September 2021 at 4pm local time[25], the Norwegian Government abandoned all forms of COVID-19 related restrictions and opened up their country after an 80% double dose vaccination coverage was reached.

While such abandonment led naturally to an increase in people mobility, total COVID-19 cases and daily new cases in Norway actually fell by over 40% and 50% respectively[26], contrary to the underlying assumption underpinning the Doherty Institute and NSW Health epidemiological modelling.

This can be confirmed by observing data from John Hopkins University as displayed in Diagram 2.

Diagram 2: New COVID-19 Cases in Norway as of 10 October 2021

Moreover, the removal of COVID-19 restrictions saw that there was no observed increase in deaths in Norway as measured by the 7-day rolling average. From 25 September 2021 through to 10 October 2021, deaths resulting from COVID-19 on a 7-day rolling average was only 1 death per day.

This can be confirmed by observing data from John Hopkins University as displayed in Diagram 3.

Diagram 3: New COVID-19 Cases in Norway as of 10 October 2021

The stability in the death rate was also confirmed in Norway’s COVID-19 related hospitalisation rate which was also stable in the period after Norway removed its COVID-19 restrictions.

This can be confirmed by observing data from the “Our World In Data” series as displayed in Diagram 4.

Diagram 4: COVID-19 Hospitalisations as of 1 October 2021

With respect to COVID-19 cases in Norway, while a decline in recorded cases was observed for the two weeks since the end of restrictions on 25 September 2021, it is important to note that the number of tests also declined.

This can be confirmed by observing data from the “Our World in Data” series as displayed in Diagram 5.

Diagram 5: COVID-19 Daily Tests in Norway as of 5 October 2021

Importantly, while the number of total and new COVID-19 cases declined in Norway, the rate of COVID-19 tests shown to generate a positive test result grew slightly from 4.1% to 4.8% over the period from 25 September 2021 to 5 October 2021 as displayed in Table 1.

Table 1: The percentage of positive COVID-19 Daily Tests in Norway

5 September 2021

October 2021

While the slight increase in the number of COVID-19 tests yielding a positive result, this increase is hardly material when considering hospitalisation and death rates resulting from COVID-19 in Norway.

This slight increase again is at odds with the central premise of the epidemiological modelling from the Doherty Institute and NSW Health which predicts that cases, hospitalisation and ICU admissions are expected to dramatically increase as a result of increased mobility resulting from a P-P infection model.

Possible Explanation for Norway?

Given that Norway is at odds with the conventional epidemiological COVID-19 explanation, it is critical to consider if any possible explanations can be found to explain the Norwegian case study.

Importantly, Norway’s high rate of vaccination cannot be one of these explanations given counterfactual evidence from both Israel and Singapore.

In both countries, the number of new daily COVID-19 cases reached their highest peak for the pandemic after a vaccination coverage over 80% was reached for citizens over 12 years old. In the case of Israel, the 80% coverage was reached in late August 2021[27] whereas in Singapore the 80% coverage was reached in early September 2021[28].

However, as illustrated in Diagram 6 with data from John Hopkins University, Israel had a 7‑day rolling average of new daily cases of only 10 on 9 June 2021 and then peaked at an all-time high for the pandemic at 16,629 new daily cases on 1 September 2021 or 9,308 cases on a 7-day rolling average basis.

Importantly, new daily cases in Israel have fallen (and continue to fall) as sharply as they rose in an almost symmetrical normal distribution (as noted above as one of the observed phenomena during the COVID-19 pandemic).

Diagram 6: New COVID-19 Cases in Israel as of 10 October 2021

Alternatively, in Singapore where the 7-day rolling average of new cases was 44 on 22 August 2021, new daily COVID-19 cases have now exploded to 2,809 cases as of 10 October 2021 and 3,303 cases on a 7-day rolling average.

Diagram 7: New COVID-19 Cases in Singapore as of 10 October 2021

Implications for NSW

In the context of NSW, the scientific assumption that COVID-19 spreads through a P-P infection model is about to be put to the test, given that NSW officially, partially, emerged from lockdown on Monday, 11 October 2021. The staged unlocking of the NSW economy and society is because those 16 years and older reached the 70% double dose vaccination threshold in the previous week.

On the basis of the available data from NSW ending 8pm on Sunday, 10 October 2021, the evidence suggests to date that a P-P infection model is not at play in NSW.

During the current lockdown, which commenced in late June 2021, the typical symmetrical normal distribution which has been noted above and detailed by scientists who subscribe to miasma theory of infection such as Hoyle, Wickramasinghe and Steele has been observed for daily COVID-19 cases, hospitalisation and ICU admissions.

As noted in Diagrams 8 - 11, after a sharp rise in:

• total new COVID-19 daily cases;

• the percentage of COVID-19 tests that are positive;

• COVID-19 related hospitalisations; and

• COVID-19 related ICU admissions

all of these are now in sharp decline even though the NSW Government implemented a moderate lifting of lockdown restrictions (e.g., the lifting of curfews in Local Government Areas of concern and allowing vaccinated citizens to recreationally congregate in outdoor settings) in late September ahead of the official unlocking of NSW on 11 October 2021.

Importantly, as noted by the case studies of Israel and Singapore the rapid rollout of the COVID-19 vaccination program (which in NSW primarily consists of the Astrazenca and Pfizer vaccines) cannot be attributed to the observed phenomenon in NSW.

Specifically, as shown in Diagram 8, new daily COVID-19 cases in NSW peaked at 1603 cases on 11 September 2021 at a 44.5% double dose vaccination rate prior to falling to under 500 new daily infections for the 24 hours to 8pm ending on 10 October 2021.

Diagram 8: New COVID-19 Cases in New South Wales as of 8pm, 10 October 2021

This relationship is also true when accounting for the level of COVID-19 testing. As shown in Diagram 9, the percentage of COVID-19 tests that yielded a positive result peaked on 5 September 2021 at 1.29% before falling by more than 50% to 0.6% in the 24 hours to 8pm on 10 October 2021.

Diagram 9: Rate of positive COVID-19 tests in New South Wales as of 8pm, 10 October 2021

Importantly, with respect to severe COVID-19 illness, both hospitalisation (as shown in Diagram 10) and ICU admissions (as shown in Diagram 11) peaked on 21 September 2021 at 1266 hospital admissions and 244 ICU admissions respectively – 10 days after the case peak and 16 days after the peak in positive PCR test ratio – which coincided with a double dose vaccination coverage rate of 53% for citizens above the age of 16.

Diagram 10: COVID-19 Hospitalisations in New South Wales

Diagram 11: COVID-19 related ICU Admissions in New South Wales

Given the graphical representation above, the coming 4 – 8 weeks will be critical to determining whether:

• the P-P or the miasma infection model is better suited to describing the COVID-19 epidemiological observed patterns in NSW;

• modelling produced by the Doherty Institute and NSW Health was based on the best available epidemiological theory and scientific evidence; and

• the extreme and totalitarian public policy response implemented by Australia’s governments based on the “National Plan” and the enormous economic, social and psychological costs experienced by the Australian people was appropriate, proportionate and justified to mitigate the public health risks posed by the COVID-19 pandemic.

Conclusion

While Australia and the world continue to battle COVID-19 and the consequences resulting from the global policy response, key scientific questions remain unanswered.

The most pressing key scientific questions, which are the most controversial, are these:

1. What is the infection model which best describes the epidemiological properties of COVID‑19?

2. Which model of the virus’ origin best contributes to determining the most appropriate infection model?

Conventional scientists around the world have blindly assumed that COVID-19 transmits via a P-P infection model. This assumption has subsequently influenced epidemiological public health modelling and the resulting public policy response which attempts to mitigate the public health risk posed by COVID-19.

In the Australian context, COVID-19 scientific controversies should be of major concern to both policy makers and citizens alike given the potential that public health measures implemented to date may be derived from a false epidemiological understanding of COVID‑19.

On the current evidence, both internationally and from NSW specifically, the miasma infection model theory appears to provide the complete understanding of observed phenomena meaning that lockdowns, social distancing and potentially ‘jab in the arm’ vaccines are, and have been, completely inappropriate public health measure responses.

Given:

• the enormous personal toll endured by the Australian people;

• the immense damage to Australia’s international reputation due to its governments embracing totalitarian public health measures; and

• the unsustainable explosion in Australia’s public sector debt and national money supply (via the Reserve Bank of Australia)

it would not be a radical statement to claim that the response to COVID-19 if based on a misguided and erroneous epidemiological understanding is the greatest disaster in Australian public administration since the 1915 catastrophic military campaign of Gallipoli.

John Adams is the Chief Economist of As Good As Gold Australia

[1] https://www.adamseconomics.com/post/australia-has-been-economically-destroyed-within-4-weeks [2] https://en.wikipedia.org/wiki/Edward_J._Steele [3] https://www.youtube.com/watch?v=Ijc4mjiIquk&feature=youtu.be

[4] Hoyle F., and Wickramasinghe C., (1979), “Diseases from Space”, J.M. Dent and Sons Ltd, United Kingdom [5] See footnote 4 [6] An axiom can be defined as a statement or proposition which is regarded as being established, accepted, or self-evidently true. [7] https://www.bbc.com/news/world-middle-east-51614920 [8] https://www.bbc.com/news/world-middle-east-51563039 [9] https://www.thelancet.com/journals/lanpub/article/PIIS2468-2667(20)30099-2/fulltext [10] Wickramasinghe, Steele, Gorczynski et al (2020) Virology Current Research Predicting the Future Trajectory of COVID-19. Virology Current Research Volume 4:1,2020 DOI DOI: 10.37421/Virol Curr Res.2020.4.111 [11] https://www.news10.com/news/covid-one-year-later-march-13-23-2020-timeline/ [12] Howard, GA, Wickramasinghe, NC, Rebhan, H et al (2020) Mid-Ocean Outbreaks of COVID-19 with Tell-Tale Signs of Aerial Incidence Virology Current Research Volume 4:1,2020 DOI: 10.37421/Virol Curr Res.2020.4.114 [13] Steele, E.J., Gorczynski ,R.M,. Rebhan, H., Carnegie, P., Temple, R., Tokoro, G., et al (2020) Implications of haplotype switching for the origin and global spread of COVID-19 Virol Curr Res Volume 4:2, 2020 DOI: 10.37421/Virol Curr Res.2020.4.115 [14]Steele EJ, Gorczynski RM, Lindley RA,Tokoro G, Wallis DH,Temple, Wickramasinghe NC Cometary Origin of COVID-19 (2021) DOI: 10.31038/IDT.2021212, https://researchopenworld.com/cometary-origin-of-covid-19/

[15] Lindley RA, Steele EJ. 2021 Analysis of SARS-CoV-2 haplotypes and genomic sequences during 2020 in Victoria, Australia, in the context of putative deficits in innate immune deaminase anti-viral responses. Scand J Immunol. 2021;00:e13100 [16] See footnote 13 [17] See footnote 4

[18] https://www.pm.gov.au/sites/default/files/media/national-plan-060821_0.pdf [19] A recent decision by his Honour Justice Richard White of the Federal Court of Australia ruled that the “National Cabinet” is not a real cabinet in the traditional parliamentary Westminster system. Further information can be obtained from the following link: https://www.afr.com/politics/federal/secrecy-laws-don-t-apply-to-national-cabinet-judge-20210805-p58g9n [20] https://www.abc.net.au/news/2021-09-20/nsw-records-935-covid-19-infections-and-four-deaths/100475524 [21] https://www.youtube.com/watch?v=eyPLKYs8nJ8 [22] https://www.camdencourier.com.au/story/7460400/surgeon-paints-grim-picture-of-nsws-covid-reopening/ [23] https://www.dailymail.co.uk/news/article-10070313/AMA-NSW-President-worries-opening-quickly-overwhelm-hospitals-warms-premier.html [24] https://www.afr.com/policy/health-and-education/cases-will-rise-as-nsw-opens-the-question-is-by-how-much-20211011-p58yyx [25] https://www.abc.net.au/news/2021-09-26/norway-lifts-covid-19-restrictions/100492390 [26] https://www.news.com.au/world/coronavirus/global/covid-cases-plunge-after-norway-abruptly-gets-rid-of-all-restrictions/news-story/d8c810f94ad5d6a5448dd03ac7d09ae0

[27] https://theconversation.com/covid-cases-are-rising-in-highly-vaccinated-israel-but-it-doesnt-mean-australia-should-give-up-and-live-with-the-virus-166404 [28] https://www.abc.net.au/news/2021-09-13/singapore-has-80-per-cent-vaccination-but-life-is-not-normal/100450154

The severe restrictions to civil and economic activity imposed on the economies around the world and the extraordinary economic stimulus by governments and central banks is having major ramifications in the immediate term which will linger in the years to come.

As noted in the article, “Accelerated Stagflation Now in Full Swing”[1], the result to date of both pandemic measures and economic policy responses around the world has been the phenomenon of accelerated stagflation, which is a combination of weak economic growth, sluggish employment outcomes (e.g., stubbornly high and rising unemployment) and surging inflation.

The effects are likely to continue into the future given that global macroeconomic and prudential policy is geared towards preventing the largest debt bubble in world economic history from collapsing.

These impacts have not escaped the Australian economy and the debate among economists and financial market practitioners has turned to what the path to normalisation may be in terms of restoring economic activity, productivity and growth as well as more sustainable macroeconomic policies.

As noted recently by the Reserve Bank of Australia (RBA), policy normalisation is highly dependent on a number of factors including the evolution of the COVID-19 pandemic and the ability to meet pre-defined economic objectives.

One of the RBA’s defined core objectives includes reaching full-employment resulting in robust wages growth.

Given this, it is important to analyse the radical transformation that has been underway in the Australian labour market since February 2020 and to consider the subsequent implications to Australian macroeconomic policy.

Monetary Policy Context to the Australian Labour Market

Before analysing the impact of the COVID-19 pandemic on the Australian labour market, it is important to establish the significance of the Australian labour market in determining of monetary policy in Australia.

As noted in the article, “RBA trapped in a never ending dead end debt bubble“[2], in order to keep intact the largest debt bubble in history, Australia’s nine governments and the RBA unleashed the largest fiscal and monetary stimulus package in Australian history.

Recently, the RBA Governor after the Board’s July 2021 meeting suggested that ending the RBA’s quantitative easing program and raising its official cash rate was dependent on the annualised growth in the Consumer Price Index (CPI) being above 2 per cent for multiple consecutive quarters, which will in turn requires annualised wages growth to be above 3 per cent.

For this to be achieved Governor Lowe stated that unemployment would need to fall below the non‑accelerating inflation rate of unemployment (NAIRU) which the RBA has estimated to be approximately 4 per cent.

In contrast to many prominent private sector economists, the RBA Board has publicly stated its belief that these conditions won’t be achieved until 2024 at the earliest. Given the sudden lockdown recently implemented in New South Wales (NSW), forecasting with accuracy so far out is a difficult and fraught task in the current environment.

Thus, determining what impact the COVID-19 pandemic has had on the Australian labour market to date and how this impact may evolve over time is critical to understanding whether the forecasts set by the RBA are realistic and achievable.

Impact of the COVID-19 Pandemic on the Australian Labour Market

To assess the impact of the COVID-19 pandemic on the Australian labour market, differences from February 2020 through to June 2021 in Australia’s:

• above 15 years-old population;

• labour force;

• participation rate;

• levels of employment (including full-time and part-time employment); and

• levels of unemployment and underemployment levels

will be analysed using the original data series from the Australian Bureau of Statistics (ABS) labour force data reports[3].

The following key elements of the Australian labour market will be analysed:

• from the Australian national perspective;

• by gender;

• by state and territory; and

• by age demographics.

This analysis will be accompanied by an analysis of data relating to Australia’s international borders to determine the impact that restricting the freedom to enter and leave Australia has had on the labour market.

It is important to note that the data presented in the Tables 1 through 5 are presented in the thousands of people, whereas the data presented in Tables 6 and 7 are presented in whole units.

Population and Labour Force Analysis

In this section we analyse, via Table 1, changes in population (15 years-old and above), labour force and those not in the labour force during the period from February 2020 through to June 2021 for each Australian state and territory by total, males and females (and for Australia overall).

Table 1: Difference in Population and Labour Force from February 2020 – June 2021 by Australian State & Territory

Participation Rate

In this section we compare and analyse, via Table 2, labour force participation in February 2020 and in June 2021 for each Australian state and territory by total, males and females (and for Australia overall).

Table 2: Participation Rates in February 2020 versus June 2021 by Australian State and Territory

Employed & Unemployed – Australian State and Territory

In this section we analyse, via Table 3, changes in total employment, full-time employment, part‑time employment and unemployment during the period from February 2020 through to June 2021 for each Australian state and territory by total, males and females (and for Australia overall).

Table 3: Differences in numbers of Employed and Unemployed from February 2020 – June 2021 by Australian State and Territory

Labour Force Analysis by Age Demographics

In this section we analyse, via Table 4, changes in labour force during the period from February 2020 through to June 2021 by various age demographic categories.

Table 4: Differences in Labour Force from February 2020 – June 2021 by Age Demographics

15-19

Employed & Unemployed – Age Demographics

In this section we analyse, via Table 5, changes in total employment, full-time employment, part‑time employment, unemployment and underemployment from February 2020 through to June 2021 by various age demographic categories.

Table 5: Differences in number of Australians Employed, Unemployed and Underemployed from February 2020 – June 2021 by Age Demographics

Impact of Australia’s International Borders on the Labour Market

One of the hallmarks of the COVID-19 pandemic is the radical policy changes made by the Australian Government to the management of Australia’s borders – i.e., who was able to enter and leave Australia.

Given Australia’s high level of both short-term and long-term visitor and resident immigration over the past two decades, examination of how the pandemic has impacted this flow of people is critical given the potential impact on the labour market, especially the supply of labour.

To assess what impact (if any) the pandemic has had on the flow of people into and out of Australia, two specific datasets from the Department of Home Affairs are presented and analysed below.

Firstly, inbound to Australia Temporary Entrants Visa Holders data[4] is presented in Table 6 at two specific points in time, being 31 December 2019 to 31 May 2021. The differences between these two points in time are also calculated.

Table 6: Temporary Entrants Visa Holders (Inbound to Australia)

Visa Type

0931 May 2021

Secondly, overseas arrivals to and departures from Australia are presented in Table 7[5]. This data is presented across two important timeframes:

• February 2020 – April 2021; and

• April 2020 – April 2021.

These two important timeframes are presented for very important reasons. While the COVID-19 pandemic started to become a serious, economically disruptive event in early February 2020, important policy changes to Australia’s international borders were not made until 20 March 2020[6] which meant that structural changes to Australia’s flow of overseas arrivals and departures were not fully borne out and witnessed until April 2020.

In Table 7, the net difference per type of arrival and departure is also calculated which includes:

• long-term resident;

• long-term visitor;

• settler;

• short-term resident; and

• short-term visitor.

Table 7: Overseas Arrivals and Departures for Australia

Feb 2020 – 020 –

Data Observations

By examining the official data from the ABS and Department of Home Affairs, as presented above in Tables 1 to 7, we can observe that:

Australia’s International Border

• Severe policy limitations placed on Australia’s borders – while starting on 1 February 2020[7], was made complete by late March 2020[8] - resulted in significant reductions in issued temporary visas for visitors, students, working holiday makers and temporary residents (skilled employment).

• The COVID-19 pandemic has seen a significant net outflow of people from Australia especially among short-term visitors, long-term visitors and short-term residents from April 2020 to April 2021.

Labour Force

• Comparing June 2021 to February 2020, Australia’s labour force grew in net terms by 21,720 people, predominately by more women entering the labour force (+35,6700 females) relative to a reduction of men leaving the labour force (-13,960 males).

• This growth was driven by higher growth in the 15 years‑plus female population and a fall in the participation rate of males from 71.4% in February 2020 to 70.9% in June 2021 (while the participation rate of females was constant over this period at 61.7%).

• Most of this growth in the total labour force was experienced in QLD (52,080 people), NSW (30,650 people) and WA (11,280 people).

• Among the age category of 15 - 34 years, the total labour force shrank by 192,390 people, whereas, importantly, the labour force grew by 114,300 among those of 35 – 54 years and by 99,800 among those of 55+ years.

• For those of 35 - 54 years, the labour force grew more strongly among females (95,820 females) compared to males (18,480 males).

• For those 55+ years, the labour force grew more strongly among males (60,890 males) compared to females (38,920 females).

Participation Rate

• Comparing June 2021 to February 2020, participation rates rose in NSW and QLD and fell everywhere else. Interestingly, the participation rate among males in NSW fell, whereas the participation rate among females in NSW rose.

Employment

• Comparing June 2021 to February 2020, a net of 115,400 additional people became employed in Australia consisting of 88,110 females (or 76.4%) and 27,290 men (or 23.65%).

Of these people, 108,160 additional people obtained part-time employment and only 7,240 people were able to secure full‑time work. Importantly, 43,890 fewer males were able to secure full-time work.

• Most people who secured employment did so in QLD (73,620 people), NSW (26,850 people), WA (22,000 people) and SA (11,570 people).

• Of these people, fewer males were employed in NSW (33,810 males), whereas more females were employed in NSW (60,650 females), QLD (30,950 females), WA (17,960 females) and SA (1,790 females).

• In total (i.e., both genders combined), fewer people secured employment in Victoria (5,290 people) which was a result of fewer women in work (15,190 females) relative to the more men in work (9,990 males).

• Whether Australian or not, 118,370 fewer people were employed in Australia between the ages of 20 and 34, whereas 108,260 more people were employed among those of 35 ‑ 44 years, 97,090 people among those 55+ years and 22,000 people among those of 15 - 19 years.

• The majority of people in the age category of 55+ years who gained employment were male (61.0 per cent) whereas the majority of people in the age categories of 35 - 44 years and 15 ‑ 19 years who gained employment were female (70.7% percent and 85.5 per cent respectively).

• Significantly, of the fewer employed between the ages of 20 and 34 employed, the majority of them were women (although only less than 5,00).

• Within the 45 - 54 years category, fewer men were employed whereas more women were employed.

Employment (Full-Time)

• Comparing June 2021 to February 2020, fewer full-time jobs were witnessed in NSW, VIC, NT, ACT and TAS whereas more full-time jobs were witnessed in QLD, SA and WA.

• Interestingly, significantly fewer males were in full‑time employment in NSW (70,530 males) and VIC (11,280 males), whereas more males were in full‑time employment in QLD (40,810 males). Alternatively, more females were in full‑time employment in NSW (43,010 females) and QLD (17,090 females), whereas fewer females were in full-time employment in VIC (6,010 females), NT (4,110 females) and WA (3,340 females).

• 165,260 fewer people were in full-time jobs between the ages of 20 and 34, whereas 105,380 more people were employed among those of 55+ years and 77,140 more among those of 35 ‑ 44 years.

Employment (Part-Time)

• Comparing June 2021 to February 2020, more part-time jobs were witnessed mainly in NSW (54,360 people), WA (20,920 people), QLD (15,720 people) and VIC (12,000 people). More males were able to secure part-time employment in all states and territories except for WA, whereas fewer females were in part time work in VIC (9,180 females), ACT (6,180 females), SA (760 females) and TAS (540 females).

• For both genders combined, more people were employed in part-time jobs across all age categories with the exception of those of 55 - 64 years. The bulk of part-time jobs taken up were people between the ages of 15 - 24 years. The majority of additional people employed in part‑time jobs were male (65.8 per cent).

Unemployment

• Comparing June 2021 to February 2020, 93,680 fewer people were unemployed in Australia, consisting of 52,430 females (56%) and 41,250 males (or 44%).

• The largest fall in the number of unemployed people were mainly in VIC (53,700 people), QLD (21,540 people), WA (10,720 people) and SA (9,250 males), whereas the number of unemployed people rose in NSW (3,800 people) and the ACT (2,320 people).

• The number of males unemployed dramatically rose in NSW (15,400 males) and significantly fell in VIC (33,750 males), QLD (16,200 males) and WA (2,440 males), whereas the number of females unemployed fell in all Australian states and territories, expect for TAS (100 people).

• Importantly, the unemployment rate worsened for males in NSW from 4.9% in February 2020 through to 5.6% in June 2021 and in the ACT from 2.4% in February 2020 through to 4.5% in June 2021.

• Alternatively, the rate of unemployment for males in Victoria witnessed a dramatic improvement from 5.6% in February 2020 through to 3.9% in June 2021.

• The unemployment rate for women fell in all states and territories except for Tasmania where unemployment rose from 4.9% in February 2020 to 5.0% in June 2021.

• The bulk of the reduction of those unemployed comprised of people between the ages of 15 - 24 years old (87,150 people or 93.0%). The total number of people unemployed between 35 - 44 years rose, driven by a greater number of females unemployed within this category.

Underemployment

• Comparing June 2021 to February 2020, the number of underemployed people fell by 66,700 people. Interestingly, the number of underemployed males rose by 18,680 whereas the number of underemployed females fell by 85,380 females.

• The largest increase in underemployment occurred in Victoria, which consisted of an additional 46,640 underemployed males and an extra 9,590 underemployed females.

• For those genders combined, the bulk of the reduction in underemployment occurred among those of 15 - 24 years (59,220 people). However, sizeable reductions in people underemployed also occurred among those of 55 - 64 years (17,850 people) and of 45 - 54 years (16,950 people).

• Interestingly, underemployment among males above 24 years of age rose by 25,630.

Analysis and Interpretation

From the data and observations identified above, the following interpretations can be made:

• The likely reason for the reduction in people employed between the ages of 20 - 34 years is related to the net outflow of people who left Australia – especially those on student visas, working holiday makers and temporary residents (skilled employment).

• Queensland has been the Australian state or territory that has enjoyed the largest increase in the size of its labour force and the number of people employed, whereas men in NSW who previously were employed in full-time roles experienced the largest reduction in employment.

• In NSW, a clear shift from full-time work to part-time work can be observed, especially for men.

• The closure of Australia’s international borders has provided for middle-aged (35 - 44 years) and older Australians (especially 55+ years) with the opportunity to re-enter the labour force and secure full-time work. But the bulk of these employment opportunities have been filled by women.

• The combination of the extraordinary economic stimulus measures and the shutdown of Australia’s international borders has resulted in a reduction in over 150,000 unemployed and underemployed people during the course of the pandemic.

• Australia’s large net immigration levels in the past two decades has been contributing to additional competition in the labour market. This in part explains why we have had relatively high (or stubborn) levels of unemployment and underemployment and weak wages growth (which has long-confounded the economic forecasters at the RBA and Federal Treasury).

• The re-opening of Australia’s borders (whether rapid or gradual) will pose a threat, particularly to older Australians who have enjoyed greater job opportunities during the COVID-19 pandemic. In the short‑term, this may push unemployment up or cause older Australians to leave the labour force altogether without passing through the unemployment statistics or queues.

• Returning to the polices of the pre-pandemic era will make it less likely that the RBA will achieve its full-employment, wage and inflation objectives (particularly that of solid wages growth).

Conclusion

The COVID-19 pandemic has caused the greatest disruption to the Australian economy since the great depression of the 1930s.

To save the largest debt bubble in Australian history, the most extraordinary fiscal and monetary economic stimulus package was unleashed to offset the disruptive economic impacts of the COVID‑19 lockdowns, including shutting down Australia’s international borders.

In mid-2021, the Australian public policy debate has moved towards when and how economic policy will be normalised and to what degree.

Within this context, the RBA has indicated that the cessation of QE and the raising of the official cash rate is dependent on the Australian economy achieving a rate of unemployment below full employment (as measured by the NAIRU), resulting in the annualised growth rate of wages reaching approximately 3% in order to sustainably lift the annualised growth rate of the CPI above 2% for multiple consecutive quarters.

Such pre-requisites invite an investigation of the Australian labour market to understand what impact the COVID-19 pandemic has had on employment conditions in Australia, especially in light of the severe restrictions imposed to Australia’s international borders.

What the pandemic has exposed is that Australia’s pre-pandemic immigration policy was denying employment opportunities for Australians, particularly older ones.

Creating slack within Australia’s labour market through mass immigration has been a contributing policy to keeping a lid on wages growth and therefore the official rate of inflation.

This has in turn allowed the RBA to keep official interest rates much lower and thus enticed extra real estate speculation and leverage, which is the core contributor to Australia’s current record household debt bubble.

Returning back to Australia’s pre-pandemic border and immigration policies will make it less likely that the RBA will meet its defined pre-requisites necessary to normalise monetary policy.

John Adams is the Chief Economist for As Good As Gold Australia

[1] https://www.adamseconomics.com/post/accelerated-stagflation-now-in-full-swing [2] https://www.adamseconomics.com/post/rba-trapped-in-a-never-ending-dead-end-debt-bubble [3] The ABS has revised the original Labour Force series for the previous two years to reflect the latest available preliminary and final estimates of the Estimated Resident Population. In response to COVID-19 related changes in travel, the ABS has been revising preliminary Net Overseas Migration estimates more frequently.

The usual resident civilian population in March 2021 was revised down by around 0.2% (around 39,600 people). Given the largest source of revisions to population estimates and survey benchmarks are revisions to net overseas migration estimates, the largest revisions were to age groups which comprise a higher share of migration. For example, the largest revision was to the number of people age 25-29, which was revised down by around 0.7% in March 2021.

Further information: https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release [4] The data presented in Table 6 is ‘stock data’ given that the total number of temporary entrant visa holder data is presented at the two specified points in time whereas the calculated difference is known as the ‘flow data’. [5] The data presented in Table 7 is ‘flow data’ given that the data presented is not data fixed at a point in time, but rather data that shows movement of people over time. [6] See the following media release issued by the Australian Prime Minister on 19 March 2020: https://www.pm.gov.au/media/border-restrictions- “Australia is closing its borders to all non-citizens and non-residents. The entry ban takes effect from 9pm AEDT Friday, 20 March 2020, with exemptions only for Australian citizens, permanent residents and their immediate family, including spouses, legal guardians and dependants.”

[7] https://www.bbc.com/news/world-51338899 [8] https://www.pm.gov.au/media/border-restrictions

These developments centre around Australia’s and the world’s largest debt bubble on record, which shows no sign of resolution.

In the past week, the board of the Reserve Bank of Australia (RBA) met to determine the future course of Australia’s monetary policy and while symbolic cosmetic changes where offered, these changes were negligible in both:

• influencing immediate-term economic conditions; and

• addressing Australia’s chronic macroeconomic structural imbalances.

Given the scale of Australia’s debt mountain, the RBA has trapped itself in a catch-22 with its monetary policy now, in effect, having only one mission – to prevent the collapse of Australia’s debt bubble, which can only be achieved through ever-more physical and/or digital money printing, hence ongoing credit creation and inflationism.

The end result being that economic living standards will continue to deteriorate in the coming years.

Economic Context of “Accelerated Stagflation”

Before analysing the meeting that took place at the RBA – and commentary that ensued - it is important to establish the broader economic context in which that meeting took place.

As noted in the June 2020 article, “Can Central Banks save the largest debt bubble in world history”[2], the unprecedented rollout of massive economic stimulus packages across the world in 2020 was done primarily as an attempt to save the largest global debt bubble in history from collapsing. Starving off such a bubble collapse would thus prevent (or postpone) a deep deflationary depression, consistent with the writings of American economist Harry Dent.

The conclusion of this article was that the economic phenomena of stagflation would be the likely resultant outcome in the short to medium-term.

This analysis was followed up by Adams and North who in November 2020 released the episode entitled “Australia’s economic emperor embraces fanatical extremism”[3], on their YouTube Channel “In the Interests of the People”. This episode documented the policy desperation of the RBA Board when it announced further extraordinary monetary stimulus measures beyond its March 2020 package at its November 2020 meeting.

Adams and North noted that the RBA had taken monetary policy beyond the point of no return in terms of pre-pandemic policy normalisation given that such normalisation would lead to a unsustainable rise in the systemic risk to Australia’s banking and financial system given the scale of Australia’s debt burden, especially household debt.

This analysis was followed up in February 2021, when Adams and North documented in the episode “Australians are overdosing on debt again”[4], that the combination of extraordinary fiscal and monetary policies, coupled with mainstream media propaganda, was resulting in a rapid new accumulation of household debt by some Australians, especially given the reinvigorated demand for houses.

These domestic factors coupled with the initial set of economic policies of the Biden Administration, led to Adams forecasting in February 2021 via the article “The Biden Administration will Accelerate Stagflation” [5] an acceleration of the stagflation process in 2021 across the world which commenced in 2020.

Accelerated stagflation means that rising rates of inflation are coupled with weak economic growth and/or relatively higher (or rising) unemployment and underemployment, typically combined with so many that are unable to generate sufficient disposable income that offsets rising prices and living/business expenses.

This forecast was followed-up via the June 2021 article entitled, “Accelerated Stagflation is now in full swing”[6], which documented evidence of accelerating stagflation, demonstrating the accuracy of Adams’ February 2021 economic forecast.

Current Debt Bubble Dimensions

Importantly, while stagflation has manifested and accelerated across the world in the past year, so has the growth in Australian and global debt. That is, the very thing which policy makers, even up to the pandemic, sought to protect from collapse has become ever larger and risker via the unprecedented economic stimulus policies.

According to the Institute for International Finance global debt rose to $US 289 trillion by March 2021 or 360% of global gross domestic product (GDP) – the largest global debt bubble in both in absolute and relative (to nominal GDP) terms in recorded economic history.

In terms of Australian debt:

• household debt rose to $AUD 2.58 trillion or 129.4% of Australian GDP for March 2021 (second highest in the world behind Switzerland as a percentage of GDP)[7];

• net foreign debt remained near its peak (of March 2020) at $AUD 1.13 trillion (or 57.2% of GDP) as of March 2021[8]; and

• gross public sector debt across Australia’s nine governments (i.e., Federal, State and Territory) as measured by ‘total non-financial public sector’ is projected to balloon by an extra $AUD 974.74 billion from July 2019 (pre‑COVID‑19 pandemic) through to June 2024, taking it to $AUD 1.780 trillion.

These figures suggest that Australia has:

• the largest household debt bubble in its national history;

• a net foreign debt bubble, which according to Brain and Manning (2017)[9], is sizeable enough to potentially trigger either a currency or balance of payments crisis if Australia’s foreign creditors were to lose confidence in Australia’s capacity to meet its international obligations; and

• an emerging public sector debt bubble given the projected scale of increased public sector debt over the forward estimates which can only be financed through ultra-low interest rates and extraordinary bond market interventions by the RBA.

Importantly, the majority of Australia’s nine governments do not have any plans to return to sustainable and recurring budget surpluses over the forward estimates.

Background Context to RBA July 2021 Meeting

Given the macroeconomic context illustrated above, speculation has increased for months, particularly in financial markets, that the major central banks around the world will begin to taper their economic stimulus programs, especially in light of recent decisions by the central banks of Russia and Brazil to raise rates to tackle surging inflation.

Such speculation has been rampant in Australia for weeks especially among bank economists and the Australian Financial Review that the RBA would follow suit. Such speculation was fuelled by the lower-than-expected rate of unemployment for May 2021 as announced by the Australian Bureau of Statistics[10][11].

Bank economists such as CBA Chief Economist Gareth Aird went in late June 2021 predicting that official interest rates in Australia would start to rise at the end of 2022 whereas Westpac Chief Economist Bill Evans publicly predicted that this would occur in the March quarter of 2023[12].

Evans went further to forecast that the official cash rate would peak at 1.25% in 2024, taking household debt servicing levels back to early 2020 (i.e., pre-COVID-19 pandemic) debt servicing levels.

RBA Board July 2021 Policy Announcement

Given the backdrop, the RBA Board made a number of important policy pronouncements at their 6 July 2021 meeting including:

1. keeping the official cash rate at 0.1% and the interest rate payable to exchange settlement accounts (i.e., commercial bank reserves held at the RBA) at 0%;

2. extending government bond purchases (i.e., the third tranche of quantitative easing (QE)) at a rate of $AUD 4 billion per week from September 2021 through to November 2021 (at a split of 80% Australian Govt and 20% State/Territory Govt bonds) resulting in the RBA owning an expected $AUD 237 billion of domestic government bonds by November 2021 (30% of total Australian Government and 15% of state/territory government bonds on issue respectively[13]);

3. keeping its commitment to Yield Curve Control (YCC) for the April 2024 Australian Government bond at 0.1% and not extending YCC to the November 2024 Australian Government bond; and

4. no extension of the Term Funding Facility – which, by June 2021, had been subscribed to the tune of $AUD 188 billion over 3 years to mid-2024 at 0.1%.

These policy pronouncements were also accompanied by a number of material statements by RBA Governor Philip Lowe at his official press conference as well as his subsequent speech to the Economics Society of Australia, Queensland Branch, on 8 July 2021.

These statements included:

Yield Curve Control

• the YCC interest rate and the official cash rate come as a package and thus will be set at the same rate.

Quantitative Easing

• future decisions regarding the RBA’s bond purchasing program (i.e., QE) are dependent on:

o the economic effectiveness of its existing bond purchases;

o actions of other international central banks; and

o Australia’s progress towards full employment.

• the effectiveness of the RBA’s QE program on economic activity is not dependent on the flow of new bond purchases but rather on the overall stock of government bonds acquired by the RBA.

• there is no locked-in path for the RBA’s QE program and may be scaled up to a higher rate of bond purchases if required.

Official Cash Rate

• the RBA’s expectation is that its official cash rate would unlikely increase until 2024 and would require the cessation of QE first and for inflation, as measured by the consumer price index (CPI) to be comfortably between the 2% - 3% band for several quarters.

• that for the CPI to increase and remain above an annualised rate of 2%, wages growth would need to rise above 3% - even though inflation (as acknowledged by the RBA) can be generated from outside the Australian labour market.

Full Employment

• that the RBA estimated full employment to be approximately 4% meaning that, for wages growth and price inflation to exceed stated benchmarks, unemployment would need to fall well below 4%.

• that, in the interim, the closure of Australia’s border was contributing to lower unemployment (particularly in regional and rural Australia as well as limited labour shortages elsewhere) and sizeable wage increases – but that this phenomenon may change in 2022 as Australia’s borders are gradually re-opened.

Real Estate Prices

• monetary policy is not concerned with the stock of household debt and real estate prices – other tools such as prudential lending standards issued by the Australian Prudential Regulation Authority, are considered to have the capacity to address these issues if household credit was to grow faster than household disposable income.

Implications

Importantly, there are four major implications to draw from the RBA’s policy pronouncement.

Firstly, despite the prominent attention given by Australia’s financial market and media, the resulting net economic effects of the RBA’s announced policy adjustments have been negligible to date.

Anecdotal evidence suggests that 4 and 5-year fixed residential mortgage interest rates have started to move higher by approximately 0.3% to 0.4% per annum in anticipation of an announcement by the RBA that it will commence tapering its stimulus program. Similar anecdotal evidence suggests that 3-year fixed residential rates have commenced rising, albeit to a lesser degree.

Little evidence to date suggests that these movements in long-term fixed mortgage rates will impact household decision making – especially the decision on whether to enter into new mortgage or personal contracts to finance purchases of residential or commercial property.

Secondly, while Australia’s economic officials and market commentators have remarked that the Australian economy is demonstrating signs of robust strength and recovery, this supposed strength is only possible with the extraordinary economic stimulus still in place, and could not be sustained if macroeconomic policy settings were normalised back to their longer-term averages (especially long‑run interest rates but also to more balanced and sustainable budgets).

Thirdly, the RBA has committed itself to an ongoing aggressive QE program without a stated intention or likely schedule of shrinking its balance sheet through quantitative tightening (QT) in terms of timing or quantity.

This will provide elected officials in both the Australian Government as well as State/Territory Governments ample ability to continue running large, undisciplined fiscal deficits that are financed, at little interest cost, through RBA-monetised public sector debt.

Fourthly, at the macro ‘helicopter’ view, the RBA and, by extension, Australia’s monetary policy is completely stuck in terms of both:

• the official cash rate; and

• the scale of assets which have been accumulated by the RBA balance sheet.

To illustrate this latter point, witness Diagrams 1 and 2 below.

In Diagram 1, Australia’s official cash rate has, from April 1990 to July 2021, been reduced from 15% to just 0.1%, with the average cash rate over this period being 4.7%. Moreover, in Diagram 2, the balance sheet of the RBA in terms of assets has dramatically grown from $AUD 188.79 billion in March 2020 (at the commencement of the COVID-19 pandemic) through to $AUD 539.87 billion as of 30 June 2021.

Diagram 1: Australia’s Official Cash Rate

Diagram 2: Total Assets of the Reserve Bank of Australia

Given the scale of Australia’s debt bubbles (as detailed above) and structural imbalances in resource allocation (especially the quantum of labour and capital being allocated to residential and commercial real estate including via the construction sector) these phenomena cannot be materially reversed either through:

• raising the RBA’s official cash rate; or

• a sustained program of QT which would shrink the size of the RBA’s balance sheet.

To do so would ultimately increase the interest servicing costs on existing household and commercial debt and lead to higher incidences of:

· financial distress (especially mortgage stress);

· repayment delinquencies; and

· debt defaults.

Moreover, if these debt defaults were to rise to a level of critical mass, then macroeconomic systemic risk would subsequently rise to a point that would threaten the stability of Australia’s financial system.

Importantly, Australia’s banks are particularly vulnerable to this risk given that their exposure to residential mortgages as a percentage of total loans issued is well over 60%, which is approximately 1.5 times more than their international counterparts.

Thus, if such systemic risk were to be realised, this would:

• place the Australian banking sector at great risk of collapse;

• potentially trigger the largest economic depression in Australian history beyond the 17% collapse in GDP over 24 months experienced during the 1892-93 Australian economic depression;

• potentially result in either a partial or full default of Australia’s foreign debt obligations; and

• potentially trigger panic and contagion across the global financial system, leading to a potential full-scale international financial meltdown.

In the instance that Australia was not be able to meet its foreign debt obligations, not only would this result in disastrous economic consequences for the Australian economy, but would likely result in adverse geo-political consequences, especially in the realm of:

• trade;

• immigration;

• foreign investment; and

• potentially foreign diplomatic and military assistance.

Thus, given the scale of the potential downside economic, political and geo-political effects consequences that would result from economic policy normalisation, the RBA and all levels of Australia’s governments have little option but to deploy fiscal and monetary policy to ensure that Australia’s debt bubbles remain intact, should they wish to remain as Australia’s ruling political and economic establishment.

Conclusion

Governments and central banks around the globe are attempting to stop the biggest debt bubble in world economic history does not implode. Joined in this effort is Australia, its national, state and territory governments as well as its central bank, the RBA.

Moreover, given the scale of Australia’s household debt bubble (which is the second largest in the world relative to GDP), Australia’s commercial banks in particular are perhaps more vulnerable than any of their international counterparts.

Economic policy normalisation (i.e., returning interest rates and budget balances to more normal and sustainable levels) that hopes to reduce the size of Australia’s debt bubbles to more sustainable levels is almost impossible and thus the RBA and Australia’s monetary policy are trapped in a debt bubble which they cannot get out of.

Whatever adjustments to Australia’s macroeconomic policy mix, especially monetary policy, that policy makers will attempt to make in the future will likely be only symbolic and tokenistic at best.

For Australia’s ruling establishment, there is no acceptable alternative policy scenario that can resolve the stark mathematical reality facing the Australian economy.

Given this, accelerated stagflation , and potentially hyper-stagflationism, appears to be the inevitable economic nightmare facing the Australian people.

John Adams is the Chief Economist for As Good As Gold Australia

[1] This includes the fallout resulting from the risk mitigation strategies of lockdowns and the vaccine rollout. [2] https://www.adamseconomics.com/post/can-central-banks-save-the-largest-debt-bubble-in-world-history [3] https://www.youtube.com/watch?v=6n7HZGdVEUY [4] https://www.youtube.com/watch?v=QyRwXL8pRWQ [5] https://www.adamseconomics.com/post/the-biden-administration-will-accelerate-stagflation [6] https://www.adamseconomics.com/post/accelerated-stagflation-now-in-full-swing [7] https://www.businessinsider.com.au/australian-households-mortgage-debt-oecd-2021-6 [8] https://www.abs.gov.au/statistics/economy/international-trade/balance-payments-and-international-investment-position-australia/mar-2021/530202.xls

[9] Brain and Manning (2017), “Credit Code Red”, Scribe Publications, Melbourne, Australia. [10] https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release [11]Note, this contrasts with private sector statistical providers, such as Roy Morgan, who’s recently published statistical series is in stark contrast suggesting rising unemployment in Australia. [12] https://www.afr.com/policy/economy/cba-calls-interest-rate-hike-in-late-2022-20210623-p583g9

[13] Note that the 1st QE program was announced in November 2020 to the tune of $AUD 100 billion which was primarily focused on purchasing 5 and 10-year government bonds through to April 2021. The 2nd QE program was announced in February 2021 which would see a further $AUD 100 billion of government bonds being purchased through to September 2021 at a rate of $AUD 5 billion per week.

One of these risks which is developing with rapid pace are Central Bank Digital Currencies (CBDCs). According to a Bank of International Settlements (BIS) 2021 survey[1]:

• 86% of central banks are actively researching the potential for CBDCs;

• 60% were experimenting with CBDC associated technology; and

• 14% were deploying CBDC pilot projects.

The development of CBDCs potentially represents one of the largest changes to modern banking and finance (as well as the global financial system) in decades[2], even though, as noted by the BIS[3], the concept was proposed by American economist, James Tobin, in 1987[4].

CBDCs have been the subject of much speculation of late regarding their intent and implications within economic and financial circles (both mainstream as well as alternative circles). However, to date, they have generated little debate or scrutiny by the public-at-large.

This latter fact is rather astonishing given the potential scale of change to economic life that may result from the introduction of CBDCs.

Current Structure of Currency

As noted by the International Monetary Fund in 2021[5], economies around the world currently operate under a “dual monetary system” comprising of:

• Publicly-issued currency by central banks in the form of physical cash (coins or banknotes) and central bank reserves which constitute legal tender (i.e., form of currency or money which are legally recognised as a means of payment to settle financial obligations such as debts, taxes, contracts, legal fines or damages)[6]; and

• Privately-issued currency by private commercial banks, telecom companies and specialised private payment providers – that is, digital forms of legal tender that are issued and held by non-government financial institutions (e.g., bank deposits or balances held in payment systems such as Paypal or Alipay).

This dual system is able to co-exist and facilitate commerce and economic activity given that privately-issued currency can be redeemed at a fixed face value of legal tender currency issued by central banks.

Within this context legal tender currency is of a ‘fiat’ nature meaning that its nominal value is set by government decree and does not possess any underlying intrinsic value, such as forms of money backed by a physical commodity such as physical gold or silver bullion.

An important distinction of this dual system is that physical cash and central bank reserves are the liabilities of central banks, whereas privately-issued currency is the liabilities of private sector payment providers.

Historically, a commercial bank would become insolvent when they couldn’t meet their liability obligations, whether this resulted from a bank run, fraud or experiencing technical outages.

Under this dual system, commercial banks and other private sector payment systems play an important financial intermediation role, including:

• managing customer facing activities – i.e., providing retail banking services such as payment accounts, authorisation, clearing, settlement and dispute resolution;

• developing and releasing innovative payment products which more efficiently facilitate commerce both domestically and internationally; and

• ensuring compliance with anti-money laundering (AML) and know-your-customer (KYC) obligations.

Thus, it is argued that central banks play an essential role in the monetary and payment system by providing stability and efficiency, whereas the private sector promotes innovation, diversity and competition.

Definition of CBDCs

Given the above explanation of the current structure of the modern fiat currency system, it is important to define what CBDCs are and what role they may play within this structure.

CBDCs are digital or virtual forms of physical cash represented through an electronic record or digital token that is issued and regulated by a country’s central monetary authority (i.e., its central bank)[7] via a centralised ledger.

CBDCs are centralised, which stand in stark contrast to privately-issued cryptocurrencies (such as Bitcoin) which are decentralised and unregulated.

CBDCs are not uniform and central banks have an immense range of legal, technical, operational and administrative design options to achieve their stated public policy objectives. Importantly, the policy intent of CBDCs will be neither uniform across jurisdictions nor static in time. Instead, they will tend to be a function of a country’s economic, political and social context.

As discussed in greater detail below, CBDCs can both co-exist and operate in parallel with both physical cash and privately-issued currency.

Thus, in assessing whether a proposed CBDC will, in net terms, improve or impair the function of a monetary system and broader economy, each CBDC will require individualised scrutiny and assessment.

CBDC Public Policy Rationale

Advocates of CBDCs suggest that they are necessary, certainly useful, in addressing multiple issues emerging across the global financial system of late. These issues include:

• Faster private sector payment systems – payment system providers such as Alipay are able to process 120,000 transactions per second, which is almost double the processing speed of credit card companies (such as Visa) and are much faster than traditional processing times of commercial banks[8].

Moreover, the emergence of stable coins – i.e., private cryptocurrencies that are backed by a reserve asset (e.g., this can include a basket comprising of fiat currencies (one or more), fiat currency equivalents, or short-term government securities) - means that private cryptocurrencies and their associated digital infrastructure can directly compete with the existing dual-currency central bank-commercial bank system (as described above).

Thus, private sector innovation in payment systems and private cryptocurrencies mean that the existing global financial system with its traditional forms of currency and bank payment systems are too slow and thus are at risk of becoming obsolete legacy systems.

• Retaining sovereign control – the emergence of private sector payment systems means that central banks contain less control of the money supply thus rendering monetary policy less effective as an economic policy tool[9].

• Financial stability – the potential failure of a private issuer of digital currency could disrupt the payment system and destabilise either the financial system of a nation (and even the global economy, if significant enough)[10].

• Financial inclusion – the rise of narrow and private money networks could exclude segments of an economy’s population from enjoying digital financial services or being able to consume particular goods and services[11] (sometimes referred to as ‘unbanked’ customers).

• Zero-lower bound interest rates (i.e., negative interest rates) – the existence of physical cash results in the severe curtailment of the ability of central banks to lower official interest rates below the zero bound (i.e., implement negative nominal interest rates) given the risk that citizens are likely to withdraw from the financial system by hoarding physical cash if negative nominal interest rates are implemented[12].

• Enhancing the effectiveness of fiscal policy – the existing dual-currency system makes the deployment of fiscal stimulus payments (whether one-off payments or continual payments such as Universal Basic Income or UBI) highly cumbersome and inefficient for governments who deal directly with citizens or who issue payments through financial intermediaries[13].

• Declining use of physical cash – the declining use of physical cash in particular economies coupled with the widespread use of alternative digital currencies by the private sector could undermine market competition – for example, where a company uses their dominant position in one industry/sector to control payments and competition in other entities (or sectors)[14].

• Cyber risk – with “Big-Tech” providing payment options through cloud-based technology, such technology presents risks to wholesale and retail market participants which may undermine confidence in digital finance as a means of facilitating transactions and storing value.

Thus, given the issues raised above, advocates for CBDCs argue that CBDCs are able to resolve these issues by:

• settling wholesale and retail level transactions at processing speeds on par with private payments systems offered by “Big-Tech” firms (such as Facebook or Paypal) but at a much lower per-transaction cost, thus arguably generating a rise in productivity;

• providing a resilient and universally-accepted form of digital payment;

• preventing the leakage of the money supply away from central banks towards private payment systems, thus ensuring central bank relevance in the monetary system and that monetary policy retains its policy effectiveness;

• allowing central banks to intervene and stabilise the payments system and by extension the financial system in the instance where private sector failures were to occur;

• providing ‘unbanked’ citizens with the opportunity to participate in the digital economy;

• providing central banks with greater policy flexibility to implement negative nominal interest rates (i.e., official interest rates below the zero bound) without the risk of cash hoarding; and

• making fiscal policy transfer payments (including stimulus payments) more efficient by allowing governments to send central bank issued digital currency directly to the retail accounts held at central banks in the instance where a retail CBDC exists.

CBDC Operating Model and Design Features

Importantly, CBDCs are not a uniform technological innovation and, given the significant diversity in their possible design features, CBDCs can be developed to address different public policy and operational requirements. Access, the degree of anonymity and operational availability are just some of the core characteristics that central bank policy makers need to consider when designing their CBDCs.

Given this, CBDCs cannot and should not be uniformly praised or condemned. Instead, they need to be assessed at an individual nation-state level (i.e., on a case-by-case basis) given its design characteristics and operational effectiveness.

CBDC Operating Model

At its core foundations, each CBDC will have four components which will formulate its operating model. These four components are illustrated in Diagram 1 and include:

• the issuance of CBDC (including what will be issued, how and in what quantity);

• how the CBDC is then distributed through an economy;

• what payment system will facilitate the widespread adoption of the CBDC; and

• how the CBDC will/can be accessed by users (i.e., the user device).

Diagram 1: CBDC Operating Model

Across this operating model, central banks have a range of design options including critically which elements of the operating model will they define and be operationally involved in and which elements will they purposely vacate and allow the private sector to develop and implement.

CBDC Design Features

Within the context of this operating model, the key design aspects of CBDCs that need to be consider are:

• Wholesale vs retail CBDCs – Wholesale CBDCs refer to those that solely deal with wholesale transfers and payments between central banks and commercial banks and other large non‑financial institutions. Retail CBDCs are instead digital forms of centrally-issued currency which can be accessed and used by the general public.

• Centralised vs distributed – a distributed CBDC means that the digital currency (including the its electronic ledger) is able to be accessed and used across multiple devices that are communicating and co-ordinating over a network.

Especially for distributed retail CBDCs, digital wallets are an important infrastructure component. They allow users to view their balance in one or more accounts, receive currency or digital assets from other users and sometimes trade assets or execute other financial transactions.

Digital wallets offer three main types of functionality, including: user authentication, transaction authentication and user interface.

• Account-based vs token-based – Account-based CBDCs are those held in individualised accounts at the central bank. Token-based CBDCs are instead units of digital currency issued by the central bank that are recorded on the blockchain and stored in digital wallets.

• Interest-bearing characteristic ­- CBDCs that are held in accounts at the respective central bank and have the ability to generate interest income, or may even be indexed to an aggregated price index[15].

CBDC Risks

As research on CBDC develops, several risks have emerged that central banks will need to mitigate if CBDCs are to be both accepted and operationally effective. These risks include:

• Disintermediation – some have argued that account-based retail CBDCs whereby citizens have the ability to deposit their currency holdings directly at the central bank may divert essential funding sources of capital away from commercial banks thus undermining their ability to issue credit with adequate capital reserves.

• Privacy – retail and account-based CBDCs means that governments and central banks can monitor the financial transaction and economic affairs of individual economic agents, thus eliminating the benefits of privacy and confidentiality which physical cash affords individual economic agents[16].

• Loss of economic freedom – beyond the privacy concerns raised above, retail-based CBDCs pose risks to the economic freedom of individual economic agents given that central bank officials will have the ability to impose conditions on account holders.

• Technology risk – the technological infrastructure underpinning CBDCs and their operational performance may experience technical shortcomings which can hamper their effectiveness in facilitating commerce and economic activity. This risk may include cyber hacking which leads to the theft of CBDCs.

• Miscalibration of government or central bank involvement – ill-conceived interventions by government or central bank officials may result in negative consequences either for specific market participants or for the broader economy.

• Runs on commercial banks – as noted by the IMF in June 2020[17], retail CBDCs have the ability to facilitate a run on the deposits of commercial banks during periods of financial panic and distress resulting from a transfer of funds held at commercial banks to CBDCs.

• Cross-Border interoperability – this may include multiple national level CBDCs unable to effectively interact and communicate which may hamper cross-border financial flows and harm the ability to invest and trade. Thus, if seamless interoperability is not achieved, this may result in harmful international spill overs[18].

The Dark Side of CBDCs

Critically, while having considered the public policy rationale and risks associated with CBDCs, it is also important to note their potential ‘dark side’ under certain design and implementation specifications – i.e., they have the capacity to be used to diminish both economic freedom and economic welfare.

Specifically, retail account-based CBDCs provide government and central banks with the ability to install totalitarian supervisory and control systems, enabling:

• the monitoring of all economic and financial transactions within their jurisdiction;

• the collection of bulk data to be then used for other purposes, including law enforcement, the targeting of political enemies and the silencing of political dissidents;

• the implementation of social management policies such as social credit scores – i.e., imposing financial penalties or constraints on citizens who engage in activities that are disapproved by government agencies or authorities;

• the imposition of financial costs (e.g., fees) on using physical cash or exchanging physical cash for CBDCs. Such costs do not necessarily require the outright elimination or prohibition of physical cash by governments and central banks[19];

• governments and central banks to direct financial capital into asset classes preferred by policy makers (such as government bonds) or to divert capital from asset classes they disapprove;

• the compelling of economic agents (businesses and individuals) to consume particular goods and services preferred by policy makers;

• governments and central banks to impose particular conditions in the case of fiscal stimulus lump-sum payments, such as imposing time limits on when an allocation of digital currency must be spent, otherwise the digital currency may be electronically withdrawn from circulation; and

• the confiscation of CBDCs held at the central bank, either through negative nominal interest rates, specific fees and charges or by outright confiscation (such as through haircuts or deposit “bail-ins”).

As citizens and businesses come to terms with the full range of implementations and consequences that CBDCS may impose, the potential ‘dark side’ applications listed above should not be considered as purely theoretical.

Rather, especially in the context of China and the Chinese Communist Party (CCP), significant concerns have been expressed by analysts that a Chinese digital yuan will enhance the CCP’s political power, including by allowing:

• the CCP to more effectively impose party discipline within China; and

• more effective implementation of China’s social credit score system[20].

Dangerously, while China is internationally known for embracing both direct and indirect forms of totalitarianism, CBDCs provide all governments and central banks across the world, including liberal democracies, with policy tools that facilitate the centralisation of economic and political power into the hands of government politicians and bureaucratic officials.

CBDCs in Australia

Consideration of CBDCs is also occurring in Australia as well.

In November 2020, the Reserve Bank of Australia (RBA) launched a collaborative study with the Commonwealth Bank, National Australia Bank, Perpetual and ConsenSys Software to investigate the public policy rationale, use and implications of introducing a wholesale form of CBDC using distributed ledger technology in Australia[21]. This study is expected to be finalised and published by mid-2021[22].

At this stage, the RBA has ruled out the introduction of a retail CBDC for Australia stating that there is no strong public policy case[23]. However, the RBA has indicated that it will monitor the developments in other jurisdictions to inform its future position.

Whether this is the real policy position of the RBA, or whether they seek to implement a wholesale CBDC as a first stage, before implementing a retail CBDC down the track, remains to be seen.

With no public debate to date, or democratic consent given to the introduction of a CBDC in Australia, any attempt to introduce a wholesale CBDC in Australia will require substantial scrutiny by industry experts and the public-at-large to determine the full range of effects and implications.

As the RBA and other Australian economic officials continue to pursue their CBDC policy agenda, they will be aware of the realpolitik limitations to implementing a full-scale retail CBDC in Australia – especially one that may curtail or eliminate of physical cash or risk further governmental controls over the economic or political activities of the Australian people.

The major political defeat that the Morrison Government experienced in 2020 regarding its attempt to implement a $AUD 10,000 cash transaction ban - formally called the Currency (Restrictions on the Use of Cash) Bill 2019 - is a key demonstration that ordinary Australians will resist any attempt by policy makers to either criminalise the use of physical cash or facilitate its elimination.

Conclusion

Across the world, the overwhelming majority of central banks are actively researching or developing CBDCs with plans, in some instances, to rollout either a wholesale or retail CBDC for operational use.

In many instances, a clear public policy rationale, democratic mandate and legal authority have yet to be established or secured.

While arguments have been advanced that private payment systems with extremely fast transaction and processing speeds represent a threat to:

• the stability and orderly functioning of the traditional financial system; and

• the ability of central banks to implement effective monetary policy,

little empirical evidence has been presented that support these arguments.

The diverse design options available to central banks present a wide range of pubic policy, legal and technical complexities and risks that must be considered and overcome before rollout and adoption can be initiated.

As no CBDC will be the same across jurisdictions, any proposed design and introduction should not be assessed and judged using a general broad-brush framework.

Rather, each individual CBDC, whether at the national or regional level, will need to be considered against its original intent, policy mandate, legal framework and operational effectiveness to determine whether it generated (in net terms) positive or negative economic and financial impacts.

Within this context, while CBDCs have been lauded as a positive development to the evolution of the modern financial system, any benefits that CBDCs are expected to generate to the economic functioning of modern economies, and to the financial system as a whole, are yet to be presented.

Despite potential benefits, CBDCs do possess a grave danger or ‘dark side’ given that, under certain design specifications, they can provide governments and central banks with the ability to deploy totalitarian systems of state surveillance and control which undermine basic freedoms, sovereignties and economic welfare in general.

Only vigilance as well as holding government and central banks accountable for their actions will ensure that CBDCs are not misused that radically alters:

• existing structures of economic power;

• institutional arrangements; and

• cultural practices

which are essential to maintaining political and economic freedoms which have been the bedrock of western civilisation for centuries.

John Adams is the Chief Economist for As Good As Gold Australia

[1] https://www.bis.org/about/bisih/topics/cbdc.htm [2] https://www.cnbc.com/2021/04/19/central-bank-digital-currency-is-the-next-major-financial-disruptor.html [3] https://www.bis.org/publ/work948.htm [4] https://www.coindesk.com/cbdcs-time-has-come [5] https://blogs.imf.org/2021/02/18/public-and-private-money-can-coexist-in-the-digital-age/ [6] https://www.investopedia.com/terms/l/legal-tender.asp

[7] https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp [8] https://www.forbes.com/sites/frankvangansbeke/2021/06/27/why-central-bank-digital-currencies-cbdc-now-and-what-could-they-mean-for-climate-change-12/?sh=1008b43124a8 [9] https://www.cnbc.com/2021/04/19/central-bank-digital-currency-is-the-next-major-financial-disruptor.html [10] See footnote 8. [11] See footnote 8

[12] https://www.brookings.edu/blog/up-front/2020/07/23/design-choices-for-central-bank-digital-currency/ [13] See footnote 11. [14] See the following October 2020 publication by the Australian Strategic Policy Institute (ASPI): https://www.aspi.org.au/report/flipside-chinas-central-bank-digital-currency

[15] https://www.nber.org/system/files/working_papers/w23711/w23711.pdf [16] https://www.washingtonpost.com/opinions/2021/06/01/proceed-with-caution-central-bank-digital-currency/ [17] https://www.imf.org/en/Publications/WP/Issues/2020/06/26/A-Survey-of-Research-on-Retail-Central-Bank-Digital-Currency-49517 [18] See 2020 publication by the BIS: https://www.bis.org/publ/othp33.htm [19] https://www.nber.org/system/files/working_papers/w23711/w23711.pdf [20] See the following October 2020 publication by the Australian Strategic Policy Institute (ASPI): https://www.aspi.org.au/report/flipside-chinas-central-bank-digital-currency [21] https://www.rba.gov.au/media-releases/2020/mr-20-27.html [22]https://www.itnews.com.au/news/rba-to-finish-wholesale-currency-project-very-soon-563548 [23] https://www.rba.gov.au/publications/bulletin/2020/sep/retail-central-bank-digital-currency-design-considerations-rationales-and-implications.html

As noted in the article, “The Biden Administration will Accelerate Stagflation[1]”, the stagflation[2] that commenced in 2020 was expected to accelerate in 2021 resulting from the economic policies of the Biden Administration.

These policies include:

• extraordinarily large (and debt-financed) fiscal packages relating to economic stimulus and infrastructure;

• anti-employment policies such as suspending key infrastructure projects and energy exploration; and

• re-joining the Paris Climate Accord.

These policies, coupled with extraordinary economic stimulus unleashed in 2020 with the onset of the COVID-19 pandemic, have created fears that inflation will blow out even further and potentially become uncontrollable, as recently noted by analysts at Deutsche Bank[3].

While advanced economies remain committed to current accommodative economic policies, emerging economies such as Russia and Brazil have already commenced tightening monetary policy by raising interest rates in an effort to bring inflationary pressures to heel.

Without similar efforts from advanced economies, continued rising inflation coupled with subdued economic growth and employment outcomes is the most likely outcome in the coming years.

Rising Inflation

Across the world, official measures have started to show quite aggressive rates of inflation in both consumer and producer prices which are well beyond the inflation targets set by respective central banks.

Some of these official inflation rates have caught some government and central bank officials off guard who have been forced to acknowledge that inflation has manifested higher than expectations.

However, some officials such as the Chairman of the US Federal Reserve Bank have claimed that current rates of inflation will be short-lived or ‘transitory’ given that some categories of rather steep price increases have resulted from economies being opened back up after harsh, prolonged lockdowns in 2020 (associated with the COVID-19 pandemic) with certain supply chains taking longer to reboot and return to normal relative to demand.

Other economists such as Shadow Stats economist John Williams claim for example that inflation in the United States, as measured by the consumer price index methodology of the 1980s, is both structural and approximately three times higher than current rates, i.e., 12 per cent per annum[4].

Examples of recent aggressive rates of inflation are outlined in Table 1.

Table 1: 2021 Examples of Aggressive Rates of Inflation

While these inflationary outcomes may be partly explained by:

• rising commodity prices (including agriculture, energy (e.g., oil), materials (e.g., timber), minerals and metals (e.g., copper)); and

• disrupted supply chains resulting from supply bottlenecks, elevated shipping rates as well as critical component shortages such as semi‑conductors

Austrian and monetarist economists suggest that prices within these components are ultimately driven by the expansion in the money supply of fiat currencies.

Importantly, such inflationary forces are already predicted to erode the living standards of ordinary citizens. For example, the Resolution Foundation predicts that inflation in the United Kingdom is likely to rise to 4% resulting in household budgets eroding by 700 British Pounds in annual real disposable income[15].

Sluggish Economic Growth and Employment Outcomes

Importantly the other pre-requisite of stagflation is sluggish economic and employment growth. In the United States, while the Biden Administration has overseen an economic normalisation with the opening up of the US economy from the severe lockdown policies of 2020, the economic recovery has not been particularly robust.

For example, the University of Michigan’s Consumer Sentiment Index has seen a significant drop in recent months including when gauging American consumer sentiment on economic conditions[16].

Also, while US employment has continued to grow within expectations, the US labour participation rate is still well below the 63.4% level recorded in January 2020 (i.e., prior to the COVID-19 pandemic), given its recent reading of 61.6% in May 2021. Moreover, manufacturing orders remain sluggish (particularly those for consumer durable goods) and as noted by American economist Peter Schiff[17], manufacturing jobs declined on a net basis in the months of April and May 2021 by 9,000 jobs.

Beyond the United States, sluggish economic growth and employment outcomes are likely to manifest in the coming months resulting from continued economic disruptions due to the ongoing COVID-19 pandemic.

Determining how the global economy will ultimately perform is still an evolving picture, however, tighter monetary policy in emerging economies such as Russia and Brazil may also adversely impact economic growth and employment outcomes in those respective economies.

Stagflation in Australia

Importantly, in Australia, the forces of stagflation continue to manifest both in the context of cost‑push inflationary pressure and sluggish employment outcomes.

On the inflationary front, the same cost-push inflationary pressures now impacting the world are also impacting the Australian economy. Moreover, surging prices especially related to real estate and land in terms of capital values, as well as rents, mean that cost of living pressures will continue to exacerbate.

On the employment front, different measurement methodologies provide diametrically opposing assessments.

For example, the Australian Bureau of Statistics (ABS) released economic data in the past week showing the official unemployment rate falling to 5.1% and the underemployment rate falling to 7.4% while the labour force participation rate rose by 0.3% to 66.2%.

This is in stark contrast to the private sector statistical organisation Roy Morgan Research which reported that in May 2021, unemployment was 10.3%, underemployment was 8.6% and the labour force participation rate was 69.7%[18].

Irrespective of the statistical methodology employed, evidence is emerging that many of the jobs which have been created and filled in recent months have been in regional Australia given the estimated approximately 300,000 non‑resident workers who are no longer working in Australia relative to the pre-COVID-19 period.

This phenomenon has led to an abnormal divergence in the unemployment rate of Australian capital cities and regional areas, shown in Diagram 1, where unemployment in regional areas is lower than that of capital cities. Moreover, as noted recently by the Reserve Bank of Australia (RBA) Governor, the unemployment rate in regional Australia is at its lowest level in the past decade[19].

Diagram 1: Australian Unemployment Rate – Capital Cities vs Regional Areas

Importantly, many of the jobs created in the past 12 months have been either of a part time or casual nature. As noted by the ABS, in the 12 months to May 2021, 565,900 part-time jobs were created as opposed to only 421,300 full-time jobs meaning that the part-time share of the overall employment pool rose by 2.1% over the same 12-month period to 31.7%.

Thus, given these employment dynamics, many Australians on a net cash flow basis have been, or currently are, unable to find adequate levels of secure work that allows them to generate a sufficient level of household disposable income.

It is for this reason why financial stress (which includes mortgage stress[20] and rental stress[21]) is not only at record levels in Australia, but also continues to rise. For example, according to Australian data house, Digital Finance Analytics (DFA), the level of mortgage stress and rental stress reached 41.1% and 38.2% in May 2021 respectively.

Within these record levels of stress, rental stress, according to DFA, jumped significantly in May 2021 by 168,017 households.

Thus, despite relatively low levels of officially measured unemployment, weak economic conditions coupled with cost-push inflationary pressures are manifesting in lower to middle class Australians being financially squeezed and thus experiencing lower living standards.

Historically speaking, these forces constitute the underlying dynamics that define stagflation.

Given the current macroeconomic policy course which the Morrison Government and the RBA have set for Australia, this phenomenon is expected to continue.

Economic Policy Makers Are Trapped

Unfortunately for billions across the world there is little that economic policymakers can do to resolve the stagflationary forces that are currently raging across the world and are likely to intensify in the years ahead.

In many countries across the world, economic conditions have not returned to pre-pandemic levels and thus are said to still require extraordinary accommodative fiscal and monetary policy settings.

In some countries, such as the United States, expectations have been recently raised that official interest rates may be raised commencing in 2023, with tapering of quantitative easing to start sooner.

Even if economic circumstances present themselves that require a withdrawal of economic stimulus either due to runaway inflation manifesting, and/or full employment coupled with robust wages growth occurring, policy makers will have little flexibility given global debt dynamics.

The underlying fundamental policy challenge facing most nations and the world is the current global debt bubble that in both nominal and proportional terms is the largest in human history.

Any excessive tightening of macroeconomic policy settings (especially fiscal and monetary policy) would lead to the greatest deflationary depression in the history of economics, a complete antithesis of the public policy desires of governments and central banks the world over.

Thus, given that policy makers are stuck in the current policy vortex, ongoing stagflationary forces, resulting from the COVID-19 pandemic and its immediate aftermath, will likely ensue for the foreseeable future.

The only prospect to preventing stagflation from morphing into hyperinflation is for courageous policy makers to dramatically lift interest rates in similar fashion to that of former US Federal Reserve Chairman Paul Volcker in the early 1980s[22].

To date, no obvious candidate from central bank officials has emerged who can fit Volcker’s shoes.

Conclusion

Stagflation is now manifesting itself across the world. Officials are only now being forced to admit this is the case, given that stagflation is accelerating largely due to the policies of the Biden Administration.

Stagflation is not only limited to the United States but is also playing out in both advanced and emerging economies alike.

These forces have yet to fully manifest given that the COVID-19 pandemic continues to adversely disrupt economic activity (e.g. supply chains) across the world. Such disruption will only cease when either the virus dissipates or when effective medical treatments or responses are developed, accepted and deployed.

To date, many economies around the world have yet to return back to their pre-pandemic levels of economic activity, despite record levels of economic stimulus over the past 15 months.

While advanced economies have no intention to withdraw economic stimulus in the coming 18‑24 months, emerging economies such as Russia and Brazil have been already forced to aggressively raise official interest rates in their battle to subdue inflation.

While policy makers will attempt to give the appearance that their intention is to implement economic normalisation, there is little prospect of this occurring given that any real attempt to normalise fiscal, monetary and bank prudential policy will ultimately threaten the stability of the global financial system and the global debt bubble.

Thus, for the foreseeable future, accelerated stagflation will continue to manifest which will pose both challenges as well as opportunities for global investors.

In such an environment, holding precious metals such as physical gold and silver bullion is, historically, the only reliable time-proven mechanism that can provide investors protection against the erosion of their purchasing power.

Thus, despite recent downward pressure on the price of gold and silver, the current and expected future macroeconomic environment supports greater investment demand for physical gold and silver bullion which, despite price manipulation in these markets, will likely lead to higher prices in fiat currency terms.

John Adams is the Chief Economist for As Good As Gold Australia

[1] https://www.adamseconomics.com/post/the-biden-administration-will-accelerate-stagflation [2] Stagflation is defined as the combination of low economic growth, relatively high unemployment/underemployment and rising prices [3] https://www.news.com.au/finance/economy/world-economy/deutsche-bank-warns-the-global-economy-is-sitting-on-a-time-bomb/news-story/37aec2fecdc2f48eeaf927aec3a0aa00 [4]See http://www.shadowstats.com/alternate_data/inflation-charts and the following interview https://www.youtube.com/watch?v=CEs8SCN7L5g&t=1645s

[5] https://www.theguardian.com/business/2021/jun/10/us-inflation-highest-rate-stocks-consumer-price-index [6] https://www.cnbc.com/2021/06/15/retail-sales-producer-price-index-may-2021.html [7] https://www.reuters.com/world/uk/uk-inflation-rises-21-may-2021-06-16/ [8] https://www.cbc.ca/news/business/inflation-may-canada-1.6067484 [9] https://www.ft.com/content/e2154bc3-e881-442a-b5aa-37be7cbc24a9 [10] https://www.reuters.com/business/skoreas-inflation-hits-9-year-high-commodity-prices-jump-2021-06-01/ [11] https://www.fxstreet.com/analysis/mid-afternoon-market-update-dow-tumbles-over-400-points-cai-international-shares-spike-higher-202106182009 [12] https://www.cnbc.com/2021/06/09/chinas-producer-prices-surge-the-most-since-2008-cut-into-profits.html

[13] https://www.ft.com/content/c13da04f-b765-4e58-8435-d9cc27d491dc [14] https://www.ft.com/content/8b5f4b4d-cbf8-4269-af2c-c94063197bbb

[15] https://www.theguardian.com/business/2021/jun/20/uk-inflation-could-soar-above-4-this-year-thinktank-warns [16] See https://www.reuters.com/business/us-consumer-sentiment-declined-may-2021-05-28/ and https://www.reuters.com/world/us/us-consumer-sentiment-rebounds-early-june-survey-2021-06-11/ [17] https://www.youtube.com/watch?v=e8ZedMCNgRM

[18] See the different methodologies between Roy Morgan and the ABS explained here: http://www.roymorgan.com/morganpoll/unemployment/unemployment-methodology [19] https://www.rba.gov.au/speeches/2021/sp-gov-2021-06-17.html [20] Mortgage stress is defined as households who are renting that are unable to generate sufficient levels of cash flow which would allow the payment of all household expenses including mortgage repayments. [21] Rental stress is defined as households who are renting that are unable to generate sufficient levels of cash flow which would allow the payment of all household expenses including rental expenses. [22] https://www.pbs.org/newshour/economy/what-led-to-the-high-interest

The Federal Budget handed down by Australia’s Treasurer Josh Frydenberg on Tuesday, 11 May 2021 was radical and extreme in both its underlying, theoretical economic basis and its profligate spending.

Frydenberg has set the Australian Government on a path of extreme debt and deficit, which has little to do with the COVID-19 pandemic and has more to do with protecting vested interests and placating noisy political constituencies who questionably feel aggrieved ahead of the upcoming federal election.

Moreover, this path of extreme Federal debt and deficit is occurring at the same time when the most extreme form of lax monetary policy in Australian history is being implemented, in large part to help finance this extreme debt and deficit.

The likely negative medium-term economic, political and social ramifications for Australia from the fiscal course that Treasurer Frydenberg has set cannot be overstated.

Without perhaps the most extreme reversals in the history of Australian fiscal policy via the implementation of severe fiscal austerity, the Australia Government will possess little fiscal capacity to respond to future economic shocks (such as a financial crisis) and will be extremely vulnerable to weak or negative economic growth, runaway inflation or rising interest rates.

A lack of curiosity from the general public, coupled with a lack of robust analysis from professional economists as well as economic journalists and commentators, means that the overwhelming majority of the Australian people currently have little idea of the grave economic risks, even horror, we face on our horizon.

This horror will dwarf the severe financial distress and hardship that approximately one third of Australians are already experiencing.[1]

The embrace of Modern Monetary Theory

To understand the spending and debt profile of the Federal Budget, its underlying economic premise requires examination.

As noted by John Kehoe in the Australian Financial Review on 10 May 2021 in an article entitled: “How Josh Frydenberg was convinced to target unemployment”,[2] the central economic objective of the Federal Budget is to reduce Australia’s rate of unemployment to a pre-determined level of under 5 per cent.

This objective, according to Mr Kehoe, originated from the leadership of the Reserve Bank of Australia (RBA) and was supported by the leadership of the Federal Treasury.

Moreover, this objective is confirmed in the rhetoric of the Federal Government’s own budget overview website, which states:

“More people are in work than ever before and unemployment is on course to settle below 5 per cent for just the second time in almost 50 years.”[3]

As noted in the article, “The Madness of Modern Monetary Theory”,[4] the use of fiscal policy through enlarged government spending and fiscal deficits to reduce ‘involuntary unemployment’ is the central tenant of the radical heterodox economic thesis called Modern Monetary Theory (MMT).[5]

Reducing unemployment in this manner is a complete departure from classical economics, which advocates for reducing unemployment over the medium term through expanding the supply side of an economy via increased thrift and investment, coupled with structural microeconomic reform that improves investment and price signals and lifts productivity.

This latter approach was a large component of the overall economic program of the Government of John Howard when unemployment fell below 5 per cent in 2006 and 2007 (in both original and seasonally-adjusted terms). It also characterised many of the Hawke-Keating Government reforms.

Why embrace Modern Monetary Theory?

Given that MMT is a radical departure from classical economics, the question arises as to why the RBA and the Treasury advocated for a further expansion in fiscal policy – accommodated by further, record central bank money printing with few, if any, broad-based supply-side measures – to target an unemployment rate of 5 per cent (or below) as the centre piece of economic policy, in contrast to promoting market-tested, value-adding employment that generates economic wealth?

This question is worth asking, given that selecting a pre-determined rate of unemployment as the political and public policy test for fiscal policy effectiveness has never been attempted before in the history of Australian national economic policy.

While neither the Morrison Government nor Australian economic officials have to date elaborated on this question, the broader Australian macroeconomic environment must be taken into account, especially in the context of Australia’s record household debt bubble.

As noted in “The RBA prepares to defend debt bubble at all costs”,[6] a high or rising level of unemployment has the risk to cause a widespread systemic default of household and other debts through an insufficient ability to meet cashflow obligations.

Thus, in order to ensure financial stability, the RBA Governor for several years has advocated for national fiscal policy to be used as a counter-cyclical macroeconomic policy tool to ensure that Australian households are able to generate a particular level of cash flow in order to meet their debt servicing obligations.

Risks of Modern Monetary Theory

Given that Treasurer Frydenberg has embraced a demand-side driven fiscal strategy – with accommodating central bank money printing, to buy the Federal government debt bonds that few private investors want at such low interest rates – to drive unemployment lower with virtually no program of structural microeconomic (supply-side) reform, the real question facing Australian federal fiscal and macroeconomic policy is, “how financially sustainable is this current policy approach?”

MMT advocates argue that the economic and political emphasis on governments to maintain sustainable public finances is both misguided and redundant, given that they cannot ever face bankruptcy or insolvency.

Importantly, however, MMT advocates such as Australian economic academic Professor Bill Mitchell (of the University of Newcastle) down-play the risks and economic costs of runaway inflation and even hyperinflation, which may result through sizeable and ongoing budget deficits.

Rather, they argue that historical episodes of hyperinflation such as Germany and Zimbabwe were a result of a sharp and significant fall in economic output and productive capacity which therefore caused a skyrocketing in the nominal value of goods and services relative to the existing supply of locally-denominated money.

As noted in the “The Madness of Modern Monetary Theory” article:

However, these arguments regarding declining productive capacity, in and of themselves, cannot empirically justify an annualised inflation rate in Zimbabwe skyrocketing to 231 million per cent or a monthly rate of inflation in Germany of 322 per cent.

Thus, it is important to note that the use of fiscal policy to target a pre-determined level of unemployment according to the MMT school of thought does have its financial limits. Where these limits are not adhered to, substantial inflationary risks (and therefore economic costs, e.g. price volatility leading to much uncertainty in investment, saving, business and hiring decisions) may be realised, especially when government deficits are financed through extreme forms of monetary policy.

Neither of these points were publicly acknowledged by Treasurer Frydenberg in his release of the FY21‑22 Federal Budget.

New Spending has little to do with COVID-19

Having established the underlying, theoretical economic underpinnings and core economic objective of the FY21-22 Federal Budget, it is now time to examine the key budget parameters to understand how Treasurer Frydenberg and the Morrison Government hopes to achieve an unemployment rate of less than 5 per cent.

New Government Spending

At the heart of the Frydenberg budget is a commitment to significant sums of new spending from July 2021 onwards (i.e., FY21-22 to FY23-24) beyond what was initially projected in the FY20-21 Budget released in October 2020.

Table 1 details the change in spending (in underlying cash terms) between the FY20‑21 and the FY21‑22 Federal Budgets (i.e., from the October 2020 to the May 2021 Budgets, just seven months apart).

Table 1: Change in Spending from the FY20-21 Federal Budget to the FY21-22 Federal Budget

What can be witnessed in Table 1 is a lower amount of government spending in FY20-21 (to the tune of $AUD 16.6 billion) than initially anticipated, given that the anticipated COVID-19 induced economic recession and the associated level of unemployment was less severe than initially estimated.

However, the additional cumulative spending of $AUD 66.7 billion, which has been budgeted from FY 21-22 to FY23-24 demonstrates the scale of the additional, largely-discretionary spending that Frydenberg has budgeted for.

Importantly, the overwhelming majority of this spending has little to do with the COVID-19 pandemic directly, with the exception of acquiring and deploying the Government’s COVID-19 vaccine program and specific industry related support packages such as for the aviation and tourism industries.

Rather, the overwhelming bulk of this additional new spending relates to policy announcements in politically sensitive areas that may materially influence the outcome of the next Federal election.

The politically sensitive areas that received additional commitments of government funding in the FY21-22 Federal Budget include:

• Aged care;

• Mental health;

• Disabilities (the NDIS);

• Women’s safety, health and economic security (including further childcare subsidies);

• Climate change and clean energy;

• Infrastructure (which mainly seeks to reduce urban congestion); and

• Indigenous affairs.

Perpetual Annual Budget Deficits

Mammoth new government spending coupled with:

• a less than severe economic recession;

• booming iron ore prices (among other commodity prices); and

• the delivery of personal income tax cuts and business tax incentives

have all impacted the projected deficits during FY20-21 and across the forward estimates through to FY24-25 (the final outyear).

The budget papers outline that, over the coming financial years, the Australian Government is on track to deliver consecutive budget deficits through to FY24-25. The size of each of these annual deficits (in underlying cash terms) are outlined in Table 2.

Table 2: Annual Expected Fiscal Deficits from FY20-21 to FY24-25

As Table 2 demonstrates, over six financial years from just prior to the start of COVID-19 through to FY24-25, the Australian Government is expected to incur consecutive deficits accumulating to $AUD 588.7 billion.

Moreover, Table 2 demonstrates that there is no realistic prospect, or even any planned attempt, to balance the federal budget in the coming years.

Importantly, compared to the fiscal deficit estimates presented in the FY20-21 budget in October 2020, a worse deficit position can be witnessed in FY22-23 and FY23-24, as demonstrated in Table 3.

Table 3: Change in the annual deficit from the FY20-21 Federal Budget to the FY21-22 Federal Budget

As Table 3 demonstrates, while experiencing a better-than-expected budget outcome in FY20-21 and FY21-22, the budget papers reveal that the budget deficit is expected to worsen by $AUD 24 billion over financial years FY22-23 and FY23-24.

This again confirms that the spending strategy undertaken by Treasurer Frydenberg has little to do with the COVID-19 pandemic.

Critical Optimistic Budget Assumptions

The deficit projections discussed above are based on optimistic assumptions related to the COVID-19 pandemic and the performance of the Australian economy over the medium term, which are critical to the estimation and forecast of taxation revenue and (particularly welfare) payments.

If these assumptions do not eventuate, this would result in a sharp deterioration in both collected tax revenue and the annual budget deficits.

The critical assumptions in which the Federal Budget makes in relation to the COVID-19 pandemic are outlined in Table 4.

Table 4: Critical Federal Budget Covid-19 Assumptions as outlined in the Budget Papers A

Alternatively, as it relates to performance of the Australian economy, the budget assumes that the economic recovery will be underpinned by robust growth in consumption and non-mining investment.

These forecast growth rates, as outlined in the Federal Budget, are reproduced in Table 5.

Table 5: FY21-22 Federal Budget – Key Growth Assumptions

Transitory Inflation?

The one critical economic assumption whose impact cannot be fully comprehended at this juncture is the expected rate of inflation and the flow-on impact that this will have on commodity prices and Australia’s terms of trade.

The budget papers assume that the rate of inflation (as measured by the Australian Consumer Price Index) will be lower in FY21-22 at 1.75% relative to the current financial year (FY20-21) at 3.5%.

These forecasts rates of inflation are consistent with the statements from several international central banks, including that of US Federal Reserve Chairman, Jerome Powell, who has argued that an uplift in inflation in calendar year 2021 resulting from:

• fiscal and monetary economic stimulus released in 2020; and

• relaxing economically-restrictive COVID-19 pandemic measures;

will be temporary or transitory in nature.

Thus, as a result of this assumption, the Frydenberg budget assumes that in FY21-22:

• iron ore prices will fall to $US 55 per tonne from the current level of more than $US 200 per tonne; and

• Australia’s terms of trade will fall by 8 per cent.

Importantly, given the significance of iron ore and other mining and agricultural commodities to Australia’s exports, if inflation does indeed prove not to be transitory and thus energy and other commodity prices (e.g., of metals, food and fibre) remain substantially elevated, then the federal budget may enjoy a significant boost in additional tax revenue resulting from higher export income.

However, a higher-than-expected (and sustained) rate of inflation would likely reduce demand for existing and newly-issued government bonds. Without RBA action (i.e. a monetary response), this would result in lower bond prices and higher bond yields (i.e. higher interest rates) which would, in turn, increase the Australian Government’s future annual interest costs and budget deficits. But if the RBA defends its widely-publicised bond yield curve ceiling or targets – namely, preventing interest rates from rising above their current record-low levels, particularly in the short and medium-term range – then, while interest costs may not rise, private investor interest in government bonds would likely deteriorate further, meaning the RBA would increasingly become the sole buyer of both:

• newly-issued government bonds (to fund the ongoing deficits), and

• existing government bonds sold/abandoned by private bond holders seeking better (less inflation-exposed) returns.

To buy these ever-less wanted bonds (in order to keep interest rates at their current record-low levels), the RBA would need to, in effect, print and issue the money required to pay for them. As the amount of issued money chasing a given set (i.e., real value) of goods and services rises, prices and expected inflation rise too. This leads to more bonds being dumped or eschewed by private investors, more RBA bond buying and money printing and so on until these self-reinforcing effects spiral out of control. Then, such runaway (even hyper-) inflation can only be credibly ebbed by the RBA no longer defending their yield curve ceiling/targets and letting interest rates rise to allow bonds to become attractive to the private investor again – relieving the RBA of its buyer-of-last resort, money-printing and inflation turbo-charging roles. Once this point is reached, interest costs for both government and private debtors begin to sky-rocket (instead of the inflation and related costs that preceded it).

If or when this point is reached depends on the economic, social and political costs of an ever‑increasing and damaging inflation, as perceived/considered by the government of the time and authorities involved (particularly the RBA and Treasury).

When the economic and other costs of (runaway) inflation begin to exceed those of the (eventually necessary) interest rate hikes, the policy switch can – and maybe will – be flicked to inflict a different type of pain (but ultimately, the necessary one) on such an unbalanced, out-of-kilter, teetering economy and its similarly debt-laden populace. But, as the temptation to delay politically-painful budget repair and a hike in one’s own interest costs is great, governments that have fallen into these QE-fuelled inflationary spirals/holes tend to be reluctant and slow to admit the inevitable and pull the chord on the Ponzi scheme.

To limit the resulting interest rate hike and its duration, the need to issue further government bonds, at a minimum, has to be reduced, and greatly so (i.e., significant fiscal consolidation, even austerity). To spread the burden of economic re-balancing and repair, key and broad-ranging economic supply-side, productivity-enhancing reforms should also be implemented.

(Note, as tax rises are generally anathema to augmenting supply and productivity, most of the fiscal repair would need to be undertaken on the spending side of the budget (e.g. paring back welfare to its barer essentials)).

In these ways, a better balance between the money supply and the real value of goods and services produced/available can be credibly and sustainably restored – with maximum economic upside to any ultimate exit from our current, fool’s paradise malaise.

Key Budget Vulnerability – Interest Costs

With the greatest peace-time build-up of public sector debt in Australian history, the key vulnerability to the financial position of the Australian Government is the sustainability of its debt, especially in the context of the interest costs.

The budget papers reveal significant sums of interest that the Australian Government must already pay owners of Australian Government Securities (i.e., Federal Government bonds).

Table 6 outlines the annual interest costs which the Australian Government either has incurred and/or is expected to incur from financial year FY19-20 through to FY24-25, which cumulatively amounts to in excess of $AUD 113 billion.

Table 6: Interest Costs resulting from Federal Government Gross Debt

Yea

Perhaps the more frightening aspect of the cost of interest payable on the debts on the Australian Government is the effective annual rate of interest that will be incurred in the coming years.

The annual effective rate of interest that is assumed to be payable by the Australian Government is outlined in Table 7.

Table 7: Assumed Annual Effective Interest Rate payable on Australian Government Debt

As can be observed from Table 7, the annual effective rate of interest that the Australian Government is expected to incur falls from 2.45% in FY19-20 through to approximately 1.8% over financial years FY22-23 to FY24-25.

Thus, even though the annual amount of interest payable continues to go up consistent with the growth of gross debt, the growth in annual interest costs is reduced through the fall in the annual effective interest rate payable by the Australian Government (as older, higher interest rate bonds reach full term and disappear from the debt stock).

Thus, moving forward, the key vulnerability for the federal budget is the inability to meet the interest-payable obligations, which may rise from either:

• rising interest rates; or

• low economic growth resulting in insufficient government revenue to meet interest costs.

Importantly, as noted by AFR journalist John Kehoe, Treasurer Frydenberg’s fiscal strategy is to ensure that these vulnerabilities do not eventuate:

“Frydenberg’s argument is that, with interest rates historically low, economic growth will generate enough tax revenue to cover the cost of servicing interest payments over the next decade.”[7]

However, a debt overhang that generates low economic growth or rising inflationary pressure from extraordinarily expansionary fiscal and monetary policy could easily realise the Australian Government’s key budget vulnerability.

Conclusion

Using fiscal policy to drive the rate of unemployment (especially involuntary unemployment) to a pre-determined level through demand-side economic management is the core policy objective of MMT.

This is a radical departure from classical economic theory, which argues that unemployment can be reduced through a combination of thrift and investment as well as microeconomic structural economic reform.

In setting an unemployment rate policy target of less than 5 per cent, Australia’s Treasurer Josh Frydenberg has embraced the highest levels of federal government spending, deficits and debts during peace-time in Australian history.

Importantly, the policy target and subsequent government spending has little to do with the COVID‑19 pandemic and has arguably more to do with ensuring sufficient debt-servicing cash flow can be generated by the private sector (both Australian households and businesses) as well as managing political sensitive constituencies in the lead-up to the next federal election.

Over the medium term, the sustainability of the current fiscal, macro and microeconomic approach must be brought into question.

Without the most extreme forms of fiscal austerity, there is simply no way that the Australian Government can balance the federal budget, let alone repay the staggering levels of debt which are expected to be incurred in the coming years.

The key vulnerability that could bring down Treasurer Frydenberg’s fiscal house of cards is either:

• a weaker economy (through runaway inflation hitting supply and drowning those whose earnings do not keep up with cost-base rises), or

• rising interest rates which would increase the difficulty of the Australian Government to meet its interest servicing costs and drown debt-laden, interest-paying private sector entities (those that survived the preceding, strong inflation).

Ultimately, if these costs are made through evermore money printing, runaway inflation if not hyperinflation will be the end result.

John Adams is the Chief Economist for As Good As Gold Australia

[1] https://www.businessinsider.com.au/financial-stress-australia-economic-recovery-2021-3 [2] https://www.afr.com/policy/economy/how-josh-frydenberg-was-convinced-to-target-unemployment-20210504-p57oph [3] https://budget.gov.au/2021-22/content/overview.htm [4] https://www.adamseconomics.com/post/the-madness-of-modern-monetary-theory [5] It is important to note that, under MMT, a pre-determined rate of unemployment is achieved through the implementation of a job guarantee program. Such a program does not exist in Frydenberg’s budget. [6] https://www.adamseconomics.com/post/the-rba-prepares-to-defend-debt-bubble-at-all-costs

[7] https://www.afr.com/policy/economy/how-josh-frydenberg-was-convinced-to-target-unemployment-20210504-p57oph

As noted in early February 2021 via the article “The Biden Administration will Accelerate Stagflation”[1], the economic policies of the Biden Administration will accelerate the stagflation phenomenon in the US that commenced under the Trump Administration.

These economic policies include:

• massive fiscal stimulus and additional government spending, including a proposed $US 1.9 trillion stimulus package and a $US 2 trillion (over 4 years) spending package to address climate change, cleaner energy and infrastructure requirements; and

• job destroying regulations, such as re-joining the Paris Climate Accord, cancelling major construction projects (e.g. the Keystone XL pipeline and the US-Mexico border wall), prohibiting fracking on federal government land as well as raising the minimum wage to $US 15 per hour.

Accelerated stagflation will manifest itself in various ways including:

• increased expectations of future inflation;

• rising commodity prices such as crude oil, base metals such as copper and iron ore, raw materials such as lumber as well as agricultural products such as grain; and

• rising bond yields resulting from existing portfolio holdings of government bonds being liquidated and weaker private sector demand for newly issued government bonds.

Bond Market Crisis

This last point of rising bond yields has unexpectedly emerged in the week commencing 22 February 2021 with rapid speed, which has caught both financial markets and policy makers off guard.

Concerns that unprecedented COVID-19 pandemic-related economic stimulus will lead to rising inflation and possibly stagflation, even once COVID-19 lockdown policies are relaxed, have been building among investors of government bonds for several months, but have now come to ahead.

The epicentre of the bond market crisis commenced in the United States (US) but quickly spread to other major bond markets in countries such as the Australia, Japan and Germany.

United States

As reported by CNBC,[2] the yield on 10-year US Government Bonds (US Treasuries) exploded to 1.6% on 25 February 2021 on fears that stagflation may be emerging, as opposed to a robust broad‑based economic recovery.

These fears led to a failure at a bond auction of 7-year US Treasuries held on 25 February 2021. As reported by Zero Hedge,[3] the “bid-to-cover ratio”[4] for the auction came in at 2.045 - the lowest on record, signalling weak demand for US government debt.

A major factor of this auction weakness was foreign buyers (known as “indirects”) whose demand for the bond issuance plunged from 64.10% to 38.01%, the lowest level since 2014, resulting in bond dealers being required to purchase 39.81% of the issuance - the highest since 2014.

Record economic stimulus in 2020 by the former Trump administration, coupled with the accelerated stagflation policies of the Biden Administration and political instability resulting from the conduct of American public policy by Washington DC politicians and officials, are likely factors as to why foreign investors are less inclined to purchase US Treasuries, especially at current yields.

Australia

As reported by Zero Hedge[5] on 25 February 2021, the Reserve Bank of Australia’s (RBA’s) yield curve control (YCC) policy of keeping the yield on 3-year Australian Government Bonds at a target rate of 0.1% began to unravel as inflation concerns began to take hold within the Australian bond market.

As the yield began to rise to 0.15%, the RBA was forced to intervene on three separate occasions[6] to keep the integrity of its 3‑year bond yield target intact. This includes purchases of 3-year Australian Government bonds of $AUD 1 billon on 22 February, $AUD 3 billion on 24 February and a further $AUD 3 billion on 26 February 2021.

Concerningly, volatility on the yield of 3-year Australian Government Bonds did not subside at the beginning of the following week on 1 March 2021, triggering the RBA to announce a doubling of its daily bond program from $AUD 2 billion per day to $AUD 4 billion per day[7].

Moreover, concerns regarding inflation and the lack of demand for Australian Government debt led to the Australian Office of Financial Management activating the Securities Lending Facility[8] facilitating the purchase of $AUD 450 million worth of bonds on 24 and 26 February 2021 at subsidised prices.

Importantly, problems in the Australian bond market were not just limited to 3-year bonds, but also manifested itself among 10-year Australian Government bonds as well.

Within the space of 5 months, bond yields on Australian Government 10-year bonds have risen by more than 2.5 times from 0.72% on 15 October 2020 to a high of 1.871% on 25 February 2021. As noted by Australian Financial Review (AFR) columnist Christopher Joye, this rise in Australian Government bond yields was faster than other developed countries.[9]

These developments come on the heels of the RBA’s early-February 2021 announcement to launch a second round of quantitative easing (QE) worth $AUD 100 billion once the current $AUD 100 billion round of QE concludes in April 2021.[10]

At the time of writing on 2 March 2021, the RBA Governor announced the Monetary Policy Decision of the RBA Board’s March meeting[11] indicating that:

• the RBA Board remains committed to its YCC target of 0.1% on 3-year Australian Government bonds;

• the RBA is ready to inject a third tranche of QE once the first two $AUD 100 billion tranches (as mentioned above) were exhausted; and

• accommodative monetary policy was expected to remain until 2024.

Japan

As reported by Zero Hedge,[12] yields on 10-year Japanese Government Bonds rose sharply on 25 February 2021 to 0.18%, the highest since early 2016, and in contradiction to the YCC target set by the Bank of Japan “of around zero percent”.

Germany

As reported by Reuters,[13] the yield on 10-year German Government bonds also spiked reaching ‑0.203% on 26 February 2021, almost tripling from its rate of -0.637% recorded on 11 December 2020.

Immediate Central Bank Policy Response

The emergence of the current bond market crisis provides a catalyst for central banks to clarify their “forward guidance” (i.e., their stated policy intention) as well as implement additional policy steps.

As noted by Bank of America,[14] financial markets (both bonds and equity markets) are now requiring, if not demanding, that central banks take additional steps to provide reassurance. given the turmoil of recent weeks.

Given the market turmoil, failure of central banks to revise their forward guidance and implement an appropriate policy response will see:

• bond yields continuing to climb as demand for fixed income financial instruments, such as government bonds (both in the primary and secondary bond market), fall;

• a sharp fall in the value of share market equities (and potentially a share market collapse) as the risk-free cost of capital rises;

• rising borrowing costs across the global financial system for financial institutions (including banks), non-financial corporations, households and governments;

• the emergence of defaults on existing debt obligations which, given the scale of the current global debt bubble, will lead to financial contagion and market panic; and

• financial contagion culminating in a new global financial crisis that will trigger the largest deflationary depression in human history (as predicted by famous deflationists such as Harry Dent).

During the past 13 years, economic policy makers (including central bank officials) across the world have implemented the most extreme form of fiscal and monetary policy stimulus to avoid a worldwide deflationary depression at critical points such as at:

• September 2008 - during the Global Financial Crisis;

• February 2012 - during the commencement of the Greek debt crisis;

• October 2018 – during the Italian debt crisis;[15]

• January 2019 - following a sharp fall in the US share market in December 2018;[16]

• September 2019 - the crisis in the US repo market; and

• March 2020 - during the contagion of the COVID-19 pandemic on financial markets.

Given this record, it is highly unlikely that these economic policy makers and central banks officials will now reverse course on macroeconomic policy, or allow market forces to overwhelm the intent of existing policy settings.

Rather, if recent economic policy and the behaviour of governments and central banks are any guide, we are likely to witness an even greater amount of fiscal and monetary stimulus.

Indeed, as reported by the AFR,[17] an international meeting of finance ministers over the weekend of 27‑28 February 2021, US Treasury Secretary Janet Yellen urged member countries to continue pursuing:

“…significant fiscal and financial policy actions and avoid withdrawing support too early”.

Yellen also stated that, “…If there was ever a time to go big, this is the moment.”

In the case of the US, additional economic stimulus will likely result in the US Federal Reserve embracing YCC as has been noted by several US analysts in recent weeks[18][19][20].

Alternatively, while countries such as Australia and Japan already have implemented YCC at the short end of the yield curve, other policy options to contain escalating bond yields may include:

• increasing the size of existing QE programs; and

• expanding YCC to include other points of the yield curve by including longer-term maturities.

Added Pressure to the Physical Silver Market

Importantly, when considering the potential policy impact of YCC being implemented in the United States, it should be noted that YCC was a key policy tool implemented during World War 2 in order to assist in the financing of the American war effort.

As noted by Bloomberg:[21]

“The Fed and the U.S. Treasury agreed in 1942 to cap borrowing costs to fund the country’s participation in World War II. Five years later, inflation was in double digits amid the post-war boom and the central bank was forced to start pulling back.”

Thus, additional economic stimulus measures such as implementing or expanding YCC, or expanding existing QE programs, will likely prove to be inflationary and result in further weakness of fiat currencies, especially currencies not tied to global commodities cycles such as the US dollar.

This weakness will in turn lead to further flight to commodities including precious metals such as physical gold and silver.

The flight to precious metals will not be isolated to one region of the world, but will be likely be a phenomenon of global dimensions given that:

• the bond market crisis has emanated from the US (the largest global bond market)[22] and thus will impact the entire global financial system;

• central bank policy across the world tends to be of a globally coordinated nature (especially between the US Federal Reserve, the European Central Bank and the Bank of Japan); and

• significant quantities of US dollar denominated assets are held, not only by Americans, but also by foreign investors.

Examples of this latter point include:

• non-US holdings of US treasuries reaching $US 7.07 trillion as of December 2020;[23] and

• US dollar-denominated exchange reserves held by foreign (non-US) central banks reaching 60.5% as of the third quarter of 2020.[24]

Any additional demand for physical silver, in particular, will carry a material consequence given the extreme tightness that has developed in the global market for physical silver during February 2021, as noted in the article entitled, “The Silver Market Fast Approaches Breaking Point”.[25]

In fact, Diagram 1 from that article (which has been reproduced below) illustrates 5 points of stress across the physical silver market that are likely to worsen if additional monetary stimulus results in sustained additional demand for physical silver.

Diagram 1: Global Physical Silver Market

Cracking the Silver Market Price Ceiling

Added pressure on the physical silver market becomes an intriguing element in the determination of the spot price of silver when the mechanics and structure of the silver market are taken into account.

As noted in recent articles:

• “The undeniable manipulation of the silver market”;[26]and

• “COVID-19 exposes gold and silver price manipulation”;[27]

the current internationally recognised price of silver does not reflect the underlying physical demand and supply fundamentals of the silver market. Rather, the price of silver is being actively supressed by the actions of the New York-based COMEX futures market as well as the London Bullion Market Association (LBMA) and its member organisations (in particular, the bullion banks and bullion refiners).

Moreover, as noted in the article, “George Soros and the Silver Moon Shot” [28], systemic manipulation of the silver market means that, from a market structure perspective, the price of silver is being contained under a price ceiling well below the equilibrium silver price that is multiple times higher than the current price.

Thus, if one accepts the silver market manipulation thesis and if enough pressure is exerted through sustained demand for physical silver via:

• the wholesale and retail markets;

• exchange traded funds (or ETFs); and

• industry

then the spot price of silver is not only likely to rise, but is actually likely to expose the scale to which actual physical silver is mismatched relative to the number of contractual promises of silver ownership and delivery that have been created through derivatives contracts, leasing and rehypothecation.

Exposure of such massive mismatch, which silver analysts (e.g. David Morgan) have claimed may be as high as 1000 paper silver claims for each physical ounce of silver - is likely to result in an astronomical explosion of the spot silver price. This is because institutions that possess unbacked promises to deliver physical silver, particularly at the COMEX, will scramble to obtain as many 1,000-ounce “good delivery” silver bars in order to avoid a default of their contractual delivery obligations.

The central question for industrial consumers and investors of physical silver is whether sufficient and sustained pressure can be exerted on the physical silver market that can break the current manipulated price ceiling.

Austrian economists, based on the writings of economist Ludwig Von Mises, argue that such pressure is all but inevitable. They argue that the general public will, at some future point in time, come to understand that current fiscal and monetary policy settings are caught in a cycle of never‑ending stimulus and that this will lead to a “crack-up boom” resulting in an insatiable demand for all commodities including physical silver.

A “crack-up boom”, as explained on pages 423 - 424 of Von Mises’ book, “Human Acton”[29], is as follows:

“But if once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size.

For under these circumstances the regular costs incurred by holding cash are increased by the losses caused by the progressive fall in purchasing power. The advantages of holding cash must be paid for by sacrifices which are deemed unreasonably burdensome. This phenomenon was, in the great European inflations of the 'twenties, called flight into real goods (Flucht in die Sachwrte) or crack-up boom (Katastrophenhausse).”

Given that central banks, as noted above, have no intention to allow a deflationary depression to occur, time will tell whether the general public across the world will awaken to the fact of endless and rapid money supply growth and respond accordingly.

The Final Chapter of the COMEX?

Even if a “crack-up boom” was to translate into unprecedented demand for physical silver, perhaps the ultimate stumbling block to a release of the silver price towards true equilibrium will be unnatural interventions by institutions involved in silver market manipulation such as the COMEX futures market itself.

To several American silver analysts, potential unnatural interventions by the COMEX, such as changing market or trading rules) and forcing cash settlement of futures contracts standing for delivery, remain a primary concern.

Such concerns are warranted given that during the silver bull markets of 1980 and 2011, the COMEX in conjunction with the regulatory arms of the US Government intervened to limit the rise of the silver price.

While existing rules give the authorities at the COMEX the ability to manipulate current market and trading rules/settings, any systematic and ongoing attempt to:

• deny counterparties access to physical gold and silver bullion; or

• provide favourable conditions to bullion banks at the expense of investors and producers

whether through:

• amendments to the market rules; or

• forcing counterparties to settle claims in cash

will undermine the legitimacy and ongoing viability of the COMEX as the premier international hub in which gold and silver futures contracts are traded and settled.

The risk that an alternative futures exchange to the COMEX may emerge – one that promises to not abuse their rule‑making capability may act as a sufficient brake on, or deterrent to, any action that prevents the price of silver from moving commensurate with physical demand relative to supply.

Conclusion

With the Biden Administration in power for only five weeks, international anxieties regarding the performance of the US economy, especially with respect to inflation, coupled with the loss of American prestige given reduced confidence in American political institutions has now triggered the start of a bond market crisis through an aggressive sell off of existing US Treasuries and weak demand for newly-auctioned bonds.

This crisis has now spread across the world to other bond markets among developed nations.

The explosive nature of rising bond yields has the potential to threaten the stability of the global financial system and economy, given the size and nature of the current global debt bubble coupled with the risky financial derivatives that are now so pervasive across the world.

Thus, given the Biden Administration’s twin goals of aggressive economic stimulus and financial stability, the only recourse for American policy makers (including the US Federal Reserve) in the immediate future is evermore expansion of the money supply and the balance sheet of the US Federal Reserve – not dissimilar to their response in March 2020 to the onset of the COVID-19 pandemic.

This is also true for other jurisdictions such as Australia, Japan and Europe.

Despite attempts by central bank officials to downplay (and in some cases conceal) the risk of inflation, evident signs of stagflation whether in the US or around the world will likely lead foreign investors to rapidly lose confidence in fixed-income financial assets such as bonds as well as fiat currencies.

The flight away from fiat currencies (such as the US dollar) into hard forms of money (such the physical gold and silver bullion) will exert additional pressure in both gold and silver markets, drying up necessary physical supply required to settle contractual delivery requirements, especially in the COMEX futures market.

In the context of the silver market, the end game question to the current bond market crisis is whether sufficient pressure can be applied that breaks the price manipulation regime with the effect of releasing the silver price from its current price ceiling.

In such an event, the price of silver will shoot up to its unmanipulated equilibrium price.

Economists belonging to the Austrian school of economic thought believe that the psychological power of a ‘crack-up boom’ when manifested at a global level will be sufficient to overpower the institutions and mechanisms involved in the market manipulation of silver, including the COMEX.

Given the global nature of commodity markets in the 21st Century, any attempt to manipulate the COMEX’s market and trading rules to benefit either the US Government or American financial institutions will undermine the COMEX’s legitimacy and threaten its ongoing viability as the world’s focal point for trading silver market futures.

The risk of destroying the COMEX’s international credibility may be the key determining factor that finally liberates the global price of silver.

John Adams is the Chief Economist for As Good As Gold Australia

[1] https://www.adamseconomics.com/post/the-biden-administration-will-accelerate-stagflation [2] https://www.cnbc.com/2021/02/25/us-bonds-treasury-yields-rise-ahead-of-fourth-quarter-gdp-update.html [3] https://www.zerohedge.com/markets/treasury-yields-soar-after-catastrophic-tailing-7y-auction [4] The ‘bid-to-cover ratio’ is the dollar amount of bids in a treasury auction vs the dollar amount of bonds sold at the auction. The ‘bid-to-cover ratio’ is an indicator of the demand for US Treasuries. [5] https://www.zerohedge.com/markets/australias-yield-curve-control-verge-collapse [6] https://www.zerohedge.com/markets/japanese-10y-blows-out-above-ycc-barrier-us-yields-are-already-sliding [7] https://www.afr.com/policy/economy/rba-doubles-daily-bond-buying-to-4b-20210301-p576nr [8] https://www.aofm.gov.au/intermediaries/securities-lending-facility [9] https://www.afr.com/wealth/personal-finance/worst-bond-blood-bath-since-1994-20210225-p575nn [10]https://www.afr.com/policy/economy/rba-expands-qe-by-100bn-upgrades-employment-20210201-p56yj6 [11] https://www.rba.gov.au/media-releases/2021/mr-21-03.html [12] See footnote 7. [13] https://www.reuters.com/article/eurozone-bonds/update-3-german-bonds-recover-still-set-for-steep-monthly-selloff-idUSL1N2KW0P2 [14] https://www.zerohedge.com/markets/begging-fed-guidance-bofa-expects-fed-address-bond-rout-soon-coming-week [15] https://www.smh.com.au/business/the-economy/the-crash-is-going-to-be-violent-italy-headed-for-crisis-warns-banker-20181029-p50ckf.html [16] https://www.cnbc.com/2019/01/04/fed-chief-powell-just-walked-back-his-autopilot-remark-and-the-financial-markets-love-it.html [17] https://www.afr.com/policy/economy/debt-cost-spike-presents-a-few-challenges-for-rba-20210228-p576g7 [18] https://www.bloomberg.com/news/articles/2021-02-09/surging-inflation-may-force-fed-to-resort-to-yield-curve-control [19] https://www.kitco.com/news/2021-02-17/Is-yield-curve-control-around-the-corner-as-gold-price-faces-a-tsunami-of-bad-news.html [20]https://moneyweek.com/investments/bonds/government-bonds/602849/central-bank-bond-yield-curve-control [21]https://www.bloomberg.com/news/articles/2021-01-20/ecb-is-capping-bond-yields-but-don-t-call-it-yield-curve-control [22] https://www.icmagroup.org/Regulatory-Policy-and-Market-Practice/Secondary-Markets/bond-market-size/#:~:text=The%20SSA%20bond%20markets%20are,the%20global%20outstanding%20SSA%20market. [23] https://ticdata.treasury.gov/Publish/mfh.txt [24] https://wolfstreet.com/2020/12/31/us-dollar-as-global-reserve-currency-amid-feds-qe-and-us-government-deficits-dollar-hegemony-in-slow-decline/ [25] https://www.adamseconomics.com/post/the-silver-market-fast-approaches-breaking-point [26] https://www.adamseconomics.com/post/the-undeniable-manipulation-of-the-silver-market [27] https://www.adamseconomics.com/post/covid-19-exposes-gold-and-silver-price-manipulation [28] https://www.adamseconomics.com/post/george-soros-and-the-silver-moon-shot

[29] https://cdn.mises.org/Human%20Action_3.pdf

In the opening weeks of 2021, the global silver market has captured the imagination of millions of people around the world buzzing alive with dramatic activity.

On the heels of the dramatic short squeeze of American entertainment games retailer Game Stop which saw the share price explode from $US 17.69 per share on 8 January 2021 to $US 483 per share on 28 January 2021, focus shifted towards the silver market as retail investors published several posts on the Wall Streets Bets (WSB) reddit group highlighting the opportunity for a dramatic short squeeze in the silver market.

Such were the dramatic flair of such posts, that members of WSB suggested that collective action that targeted the silver market could drive the price of silver up from $US 25 per ounce all the way to $US 1,000 per ounce representing a potential astronomical return of 3,900 per cent.

Amazingly, the attention which WSB was able to generate has resulted in visible signs of significant and unprecedented stress growing across the physical silver market. This stress will continue to mount in pressure resulting from not only increased public attention but also by the:

• unprecedented global economic stimulus (both fiscal and monetary) in response to the COVID-19 pandemic;

• manifestation of stagflation in 2020; and

• accelerated stagflation and economic anxiety generated by the Biden Administration.

This stress is now looming as a material factor to the COMEX silver futures market[1] which has scheduled contractual delivery dates in March, May, July, September and December 2021.

This stress may become acute as early as March 2021 given that, as of 21 February 2021, the COMEX futures market is on track to be the largest delivery month of physical silver in the history of the silver futures market.

Such acute stress, if uncontrollable, may result in the breaking of the paper silver derivatives market manifesting an extreme short squeeze and price action as advocated by WSB.

The Physical Silver Market

To understand the dynamics of how a silver squeeze may occur, an understanding of the global physical silver market is required. In particular, an understanding is required as to the inflow sources of physical silver to the market and how these physical sources are consumed and accounted for.

Diagram 1 presents a high-level illustrative summary of how the current physical silver market operates. The diagram makes a clear demarcation between the inflow of physical silver into the global silver market and how this silver is consumed (i.e. outflow).

The inflow of physical silver into the global market is drawn from two main sources, they being:

• silver mining companies (SMCs); and

• the recycling and reuse of redundant silver resulting from discarded products containing silver, or silver wastage resulting from manufacturing processes.

Alternatively, the outflow of physical silver from the global market occurs in multiple ways. These ways include:

• the COMEX futures market (located in New York, USA) where raw silver is refined into 1,000 ounce ‘good delivery’ bars and is sold at a price which is hedged by SMCs providing certainty regarding forward prices in which mining output is sold;

• that consumed by secondary and tertiary industry sectors (i.e., manufacturing and retail sectors), which includes electronics, electronic cars, solar panels, fabrication, silverware, etc;

• wholesale refiners that produce wholesale investment standard silver bars (typically 1,000 ounce ‘good delivery’ bars) which are supplied to the wholesale market independent of the COMEX futures market;

• that acquired by large sophisticated investors from the wholesale market which includes sovereign governments (e.g., sovereign wealth funds), central banks, institutional investors, exchange traded funds (ETFs), large family offices, etc. The largest depository of wholesale investment standard silver bars is in London and primarily comprising of London Bullion Market Association (LBMA) approved vaults; and

• retail market refiners which produce retail investment standard silver bars and rounds that are supplied to the retail market (i.e., products which are typically smaller than 1,000 ounce ‘good delivery’ bars).

Diagram 1: Global Physical Silver Market

In addition to the diagram above, it is important to note the following:

Physical Silver Inflow

• most raw silver which is mined by SMCs comes as a by-product from mining other metals such as copper, lead and zinc. However, some SMCs also do mine pure raw silver.

• according to the Silver Institute[2], recycling accounted for 16.6% of total silver supply in 2019 (pre-COVID-19) and 17.3% in 2020 given the fall in mining output supply during the COVID‑19 pandemic.

Physical Silver Outflow

• physical delivery of 1,000 ounce ‘good delivery’ bars that result from the settlement of COMEX contracts may be transferred to London for resolution via Exchange for Physical (EFPs) contracts.

• according to the Silver Institute[3], net investment demand in 2019 was 18.8% of total demand (pre-COVID-19) and 22.4% in 2020 given both the fall in industrial demand during the COVID-19 pandemic as well as increase in investment demand resulting from the deployment of unlimited monetary stimulus by central banks.

• Silver ETFs are independent legal trusts (i.e. independent legal entities) that hold physical silver on behalf of unit holders (i.e. investors) according to the terms of the legal trust’s prospectus. Physical silver inflows and outflows in and out of the ETF’s approved vaults are managed by the trust’s appointed custodian. An inflow of financial capital into silver ETFs creates demand for physical silver and reduces the available stock of investment grade physical silver in the wholesale market. An outflow of financial capital from ETFs reduces the demand for physical silver and increases the available stock of investment grade physical silver in the wholesale market.

Silver Market Manipulation

Having described the core features of the global physical silver market, it is critical to consider how this market functions in relation to the ‘paper silver market’ and the associated international spot price.

Allegations of silver market manipulation have been well documented over the past 20 years by various international market analysts, including in the article “The undeniable manipulation of the silver market”[4].

Moreover, market manipulation, as outlined in the article “COVID-19 exposes Gold and Silver Price Manipulation”,[5] was further exposed during the start of the COVID-19 pandemic with the collapse in the spot silver price while retail investment demand spiked dramatically.

The core facets of the silver price manipulation scheme include:

• the placement of significant numbers of unbacked sell orders (or "naked shorts") in the silver futures market, meaning that the silver paper sell orders are without the requisite physical silver bullion to deliver on the contract;

• the placement and withdrawal of fake trades in the gold and silver futures market (this practice is known as "spoofing")[6];

• the rigging of rules at the commodity exchanges such as the COMEX and LBMA which allow for futures contracts to be settled in cash rather than requiring the delivery of the requisite physical silver;

• the rehypothecation of physical silver bullion which means that the same ounce of silver is used as collateral in multiple loan and lease agreements including with ETFs such as SLV; and

• the use of dark pools of money, such as the US Government Treasury Department’s Exchange Stabilisation Fund, which is liquid enough to fund the manipulation and suppression of prices in critical commodity markets such as those of gold and silver.

Given these elements it remains unclear as to the precise paper derivative to physical silver relationship given the lack of transparency regarding the available above ground silver stockpile and the claims against this stockpile.

Silver analyst David Morgan[7] has suggested there could be up to 1000 claims on each ounce of physical silver across the global market.

Such an extreme disparity manifests itself, as explained in the article "George Soros and the Silver Moon Shot",[8] via an economic market structure where a price ceiling exists below the equilibrium price that would be determined via physical silver demand and supply fundamentals.

Such a situation allows for the realisation of significant asymmetric financial returns in a similar fashion to how investor George Soros was able to break the Bank of England in 1992 by betting against an overvalued British pound.

Thus, given the "paper derivative to physical silver" relationship and the structure of the market, any stress applied to the physical silver market has the potential to unravel the paper market in an extreme short squeeze resulting in a dramatic parabolic increase in the silver price.

Five Specific Points of Stress

Having described the core features of the global physical silver market, we now point to 5 critical stress points which have emerged in the past few week since the WSB group focused their attention on silver.

These stress points are marked in Diagram 1 (see above) and are also outlined below in Table 1.

Diagram 2: London Silver Lease Rate

March 2021 - the Largest Silver Delivery Month in the History of COMEX?

Given the five stress points which can be observed in the physical silver market (as noted above), attention has now turned to the upcoming delivery months for silver on the COMEX noting that these months are March, May, July, September and December 2021.

As noted above in Table 1, the March 2021 COMEX open interest is currently standing at extraordinary large level as of Friday, 19 February 2021. Without significant action by those institutions who are holding short contracts (primarily bullion banks), the March 2021 COMEX contract may be the largest delivery date in the history of the silver market.

Moreover, as of Friday, 19 February 2021, the open interest for the May 2021 COMEX silver futures contract also stands at an extraordinary quantity of 96,432 contracts which is the equivalent to 14,760 tonnes[20].

For historical context, the previous delivery record for silver in the history of the COMEX was in July 2020 where over 17,294 contracts or 2647 tonnes (or 86.47 million ounces) were delivered.

During this period, it was revealed that those institutions that were required to make delivery of 1000 ounce ‘good delivery’ bars had insufficient quantities. This in turn led to a dramatic 60% increase (in $US dollar terms) in the price of silver from $US 17.95 per ounce to $US 28.73 per ounce over the course of a 5-week period as the price of silver was bid up in order to entice sufficient quantities to be sold to those institutions who were contractually obligated to deliver.

This dramatic increase in the silver price is illustrated in Diagram 3.

Diagram 3: Daily Silver Price in $US Dollars

As can be shown by Diagram 3, this elevated price level has been sustained since July 2020 and was sufficient for the quantities of silver required for delivery under the COMEX September and December 2020 contracts which were of a much smaller quantity relative to the July 2020 contract.

The number of COMEX silver contracts that stood for delivery and which actually took delivery from July, September and December 2020, are outlined in Table 2.

Table 2: COMEX Silver Contracts ‘Standing for Delivery’ vs Actual Deliveries[21]

Given the dramatic price action experienced in July 2020 when record COMEX deliveries of physical silver were demanded, the implications for the price of silver in March 2021 and beyond If unprecedented quantities are similarly demanded for delivery coupled with visible signs of stress across the physical silver market (as shown in Diagram 1) are potentially quite dramatic.

The precise point at which the price of silver aggressively rises is unknown. It will be dependent on the physical quantity being demanded and what is available to be supplied at the current price level.

If the volume of physical silver demanded in the March 2021 COMEX contract is able to be met at the current price level, despite the visible stress points in the physical silver market, it is possible, if not likely, that a future month in which the delivery of large quantities of physical silver are demanded, say May or July 2021, may be the point at which the silver squeeze commences.

Conclusion

In the past month, online posts initially published by WSB have created, according to industry experts, an unprecedented tidal wave of demand in the physical silver market driven by purchases via ETFs as well as the wholesale and retail markets.

This tidal wave has resulted in at least 5 visible signs of stress which can be observed at various points across the physical silver market. Evidence to date suggests that this stress shows no signs of abatement and is likely to persist if not become acute.

The objective of WSB and other new advocates of silver is to facilitate a short squeeze in the market that would result in the price of silver rising exponentially, potentially in a similar fashion to the short squeeze that occurred with Game Stop in January 2021.

Systemic and widespread documented evidence of market manipulation does help to provide the conditions for a short squeeze to occur within the silver market.

As new institutional and individual investors enter the silver market, and knowledge of market manipulation becomes more widely disseminated, the opportunity to realise asymmetric financial returns via the silver market will be more understood and thus create additional momentum and demand for physical silver via a positive feedback loop.

Looking forward, the March 2021 COMEX silver futures contract is on track to be the largest delivery month in the history of the market, outpacing the prior record set in July 2020.

Forward delivery months such as May 2021 also show a strong level of demand for physical silver through elevated levels of open interest.

Record demand for the delivery of physical silver via the COMEX in the coming weeks and months, coupled with unprecedented demand observed in February 2021 and visible signs of acute stress within the physical market, provides the necessary conditions for a sharp, accelerated rise in the price of silver moving forward.

John Adams is the Chief Economist for As Good As Gold Australia

[1] As outlined in the book “The Big Silver Short”, the COMEX silver futures market is the key price setting mechanism of the international spot price of silver. Full reference is Marcus, C., (2020), “The Big Silver Short – How the Wall Street Banks have left the Silver Market in place for the Short Squeeze of a Lifetime”, Self-Published, San Bernardino, California, United States of America [2] https://www.silverinstitute.org/silver-supply-demand/ [3] See footnote 2. [4] https://www.adamseconomics.com/post/the-undeniable-manipulation-of-the-silver-market [5] https://www.adamseconomics.com/post/covid-19-exposes-gold-and-silver-price-manipulation [6] In September 2020, Wall Street JP Morgan settled with the US Department of Justice with the payment of $US 920 million over admitted instances of spoofing in the COMEX futures silver market by on hundreds of thousands of occasions 15 traders over several years. For more, the following article: https://www.bloomberg.com/news/articles/2020-09-29/jpmorgan-pays-920-million-admits-misconduct-in-spoofing-probe

[7] Marcus, C., (2020), “The Big Silver Short – How the Wall Street Banks have left the Silver Market in place for the Short Squeeze of a Lifetime”, Self-Published, San Bernardino, California, United States of America [8] https://www.adamseconomics.com/post/george-soros-and-the-silver-moon-shot [9] See the following video entitled “Silver Shortage spreads to 1,000-ounce wholesale market”: https://www.youtube.com/watch?v=pR2bJn44tSk [10] See the following video entitled “INSANE Silver Demand #SILVERSQUEEZE” https://www.youtube.com/watch?v=Q2BtRn4pcrc [11] https://www.bullionstar.com/blogs/ronan-manly/silversqueeze-hits-london-as-slv-warns-of-limited-available-silver-supply/ [12] https://www.bullionstar.com/blogs/ronan-manly/silversqueeze-hits-london-as-slv-warns-of-limited-available-silver-supply/ [13] https://www.bullionstar.com/blogs/ronan-manly/houston-we-have-a-problem-85-of-silver-in-london-already-held-by-etfs/ [14] See the Marcus-Jensen discussion at the following link: https://www.youtube.com/watch?v=BF9pysxl6U4&t=181s [15] Given the significant cost of storage and insurance incurred with large quantities of physical silver, the lease rate in the London is typically negative signalling that owners of the physical silver are happy to pay a counterparty to hold their physical silver on their behalf. [16] As noted earlier in the article, the London silver market is the largest physical market and depository in the world. [17] See Ed Steer’s interview on Palisades Gold Ratio which was broadcasted on 17 February 2021 - https://www.youtube.com/watch?v=wtxr_yXDXTo&t=496s [18] Contango is the market condition where the future price is trading above the expected spot price. [19] This was drawn from published final COMEX silver data volume data for 19 February 2021 which was actually published by the CME Group 22 February 2021.

[20] Note that the open interest for forward delivery months have historically been at elevated levels relative to the most immediate delivery month and typically reduce in volume as the delivery date of the contract approaches.

[21] Data documented in Table 2 was kindly provided by Craig Hemke from TF Metals report.

Overview of the Trump Administration

The Trump presidency, while achieving several important policy objectives during its four years in office, did not bless the Biden presidency with strong macroeconomic fundamentals, actually quite the contrary.

In terms of national debt, US Federal Government debt (i.e., gross debt), under the Trump presidency, soared from $US 19.98 trillion at the end of 2016 to $US 26.95 trillion at the end of September 2020 (over $US 6.97 trillion) – the end of US fiscal year 2019-20. This is the greatest accumulation of gross federal government debt in the history of the United States over a four-year period[1].

While the Trump Administration attempted to normalise monetary policy by raising official interest rates from 0.65% to 2.4% and shrinking the balance sheet of the US Federal Reserve from $US 4.45 trillion to $US 3.76 trillion over the first 2.5 years of the administration, this was completely reversed in the second half of 2019 with the crisis in the repo market and the onset of the COVID-19 pandemic in 2020.

Moreover, gross external debt under the Trump Administration blew out from $US 18.02 trillion at the end of 2016 to $US 21.31 trillion in September 2020.

The COVID-19 pandemic in particular saw the Trump Administration, US Federal Reserve and

the US Congress adopt the most extreme set of macroeconomic policies in American history.

Official interest rates were slashed to zero, the balance sheet of the US Federal Reserve ballooned out to $US 7.36 trillion by the end of 2020 and in just 9 months from January to September 2020, the US Government accumulated $US 3.75 trillion in additional federal debt.

Economic Stimulus leads to Stagflation

By no means were these extreme policies exclusively implemented by the US Government, but were adopted by governments and central banks across the world in varying degrees.

The prospect of negative economic growth, high unemployment (resulting from the lockdowns and COVID-19 control measures) and rising prices (resulting from unprecedented central bank money printing) led to the June 2020 publication of “Can central banks save the largest bubble in world history”[2].

This article outlines a series of justifications why the world would be experiencing stagflation as a result of the unprecedented economic stimulus deployed in the wake of the declaration that COVID‑19 was a pandemic by the World Health Organisation.

In the Australian context, evidence of stagflation was evident by August 2020 in Australia with negative economic growth, elevated unemployment and underemployment and surging growth in the Australian money supply as measured by “Broad Money”[3].

As was the case with stagflation in the 1970s, the best asset class which performed in this environment was physical gold and silver. Consistent with both economic theory and historical performance, gold and silver had a stellar financial performance for investors who had exposure to both precious metals in both Australian and US dollar terms in 2020.

Their relative performance is outlined in in Table 1 and 2.

Accelerated Stagflation

Looking forward as we progress through 2021, and the early indications are that the Biden Administration will trigger an acceleration of the stagflation which started in 2020 under the presidency of Donald Trump in two important ways.

Method 1 - Additional Stimulus & Spending Commitments

First, the Biden Administration under the guidance of Treasury Secretary Janet Yellen has submitted to the US Congress a massive new stimulus package in the order of $US 1.9 trillion which includes a new round of COVID-19 related stimulus payments (At the time of publication this stimulus package had already passed the United States Senate).

In addition, the Biden Administration is seeking to spend $US 2 trillion over 4 years in a new mammoth spending package dealing with infrastructure, clean energy and climate change.

Such fiscal stimulus and additional policy related spending commitments could push the federal budget deficit for FY20-21 to be equal if not higher than the $US 3.1 trillion incurred in FY19-20 (noting that the US financial year runs from October through to the following September).

Even if the deficit is smaller for FY20-21, what is guaranteed is that US Federal Government Debt will reach a new high in the coming 12 months and will require a significant issuance of new US Government bonds (i.e. US treasuries) at the same time that existing short-term US treasuries will need to be rolled-over.

Thus, additional monetary stimulus in the form of quantitative easing is likely to be required to finance this additional fiscal spending in an attempt to lower bond yields and to keep the interests costs of the US Government within a manageable range.

This is ever more important given that the yield on the 10-year US treasury bond reached its highest closing day level since the start of the COVID-19 pandemic on 5 February 2021 at 1.17%. Record debt and deficits coupled with rising bond yields point to a fiscal disaster as interest costs cannot be managed.

Additional monetary stimulus in the form of Quantitative Easing would see the balance sheet of the US Federal Reserve explode beyond the current $US 7.4 trillion level.

Method 2 – Contracting Economic Supply

Second, the Biden administration has already begun introducing a wave of new regulations which is costing tens of thousands of jobs. This includes:

• re-joining the Paris climate accord which requires the United States to make drastic and immediate reductions in carbon emissions impacting multiple sectors;

• the cancellation of major infrastructure projects such as the Keystone XL pipeline;

• the prohibition of oil and gas fracking on land owned by the US Government; and

• suspending the further construction of the border wall along the US-Mexico border.

These new regulations coupled with a slew of new federal taxes which are slated for implementation will restrict the supply side of the US economy which will drive up unemployment and prices.

As Biden has already broken multiple campaign promises, it remains unclear as to the full macro and micro consequences of his policies. This uncertainty is going to have significant detrimental implications in generating economic growth.

Early Signs of Accelerated Stagflation

While the Biden Administration has only been in power for less than a month, there are several indications that accelerated stagflation is already manifesting. These indicators include:

• weak jobs growth – In January 2021, only 49,000 jobs were created in the United States while job losses in December 2020 were revised downwards from 140,000 to 227,000;

• rising price of oil – the price of oil according to the West Texas Intermediate (which is a critical input to industry and transportation) rose to highest level on 5 February 2021 to $US 57.07 per barrel – the highest since mid-January 2020;

• rising inflation expectations – according to the St Louis Federal Reserve’s 5-Year Forward Inflation Expectations Rate[4], inflation expectations rose to 2.14% on 5 February 2021, the highest rate since December 2018[5]; and

• non-energy commodity prices, as part of a bucket of 63 commodities, rose by 16% in December 2020 relative to 12 months prior in December 2019, representing the fastest rise in non-energy commodity prices since 2011[6]; and

• rising bond yields – in inflationary environments the real return of government bonds decreases and this generally triggers a sell off of government bonds resulting in the lowering of bond prices and rising bond yields. As of 5 February 2021, the yield on 10‑year and 30‑year US Government bonds reached the highest closing day rates since the start of COVID-19 at 1.17% and 1.977% respectively.

It is important to note that accelerated stagflation forces triggered by the Biden Administration would have been in train for at least 6 to 8 weeks prior to the inauguration of President Biden given that economic agents and financial markets would have altered their expectations once they accepted the results of the contested 2020 election.

Similar to the Carter Administration

Importantly, the above phenomena should come as no surprise to those who have studied the stagflation of the 1970s. The phenomena of stagflation commenced from 1974 to 1976 under the Nixon and Ford administrations both who were republicans and was exacerbated by President Carter from 1977 to 1980.

Under the Nixon and Ford Administrations, interest rates were lowered from 13% in July 1974 to 4.75% in November 1976 whereas federal budget deficits exploded in size during 1975 and 1976 under President Ford and were continued under President Carter.

As a result, annualised inflation sky rocketed from 4.75% in 1977 to 14% in 1980 and real interest rates became severely negative. Under these conditions, the price of gold and silver skyrocketed to all-time highs increasing in price by hundreds of percent.

Relative to other asset classes, gold and silver were the strongest financial performers during this period.

Implications for the Global Economy

Accelerated stagflation in the United States has significant implications not only the US economy, but also the global economy given that the United States is the epi-centre of the financial system and that US economy remains the largest economy in the world.

These implications include:

• continued expansionary monetary stimulus is likely to lead to a weaker US dollar impacting trade and investment flows;

• rising US Government bond yields, such as the 10-year treasury yield, will lead to rising funding costs for both US banks and corporations as well as international entities who rely on funding from the US credit market; and

• rising precious metal and commodity prices, which are set largely in the US (such as oil, food or precious metals (e.g. gold and silver)), will lead to a boom in commodity rich countries such as OPEC countries, Canada, Australia and Brazil; and

• rising global oil prices will lead to cost-push inflation for oil importing countries and will impact the cashflow of households through rising fuel prices.

Conclusion

In 2020, both the United States and the global economy saw the emergence of stagflation as a result of the unprecedented economic stimulus response to the COVID-19 pandemic. The impact of these policy responses will take several years to play out.

From all early indications, the economic and regulatory policies of the Biden Administration will accelerate the stagflation phenomenon through both expanding economic stimulus and restricting economic supply through economically harmful laws and regulations.

By the historical precedent of the 1970s, the price of gold and silver should rise strongly in response as investors seek to protect their purchasing power from rising inflation.

Investors who take early and prudent action in readjusting their financial portfolio such as accumulating gold and silver to protect their purchasing power will be able to mitigate the adverse impacts of stagflation.

Those who do not do so are likely to experience compressed levels of real disposable income and thus falling living standards.

[1] At the time of publishing this article, the final US Government debt figure for the end of 2020 is yet to be released.See the following link for the latest gross US federal government debt statistics - https://fred.stlouisfed.org/series/GFDEBTN

[2] https://www.adamseconomics.com/post/can-central-banks-save-the-largest-debt-bubble-in-world-history [3] This evidence was presented by on the In the Interests of the People YouTube channel on 3 August 2020 in an episode entitled “Stagflation Is Occurring Before Your Very Eyes”. See the following link: https://www.youtube.com/watch?v=NeP3ZR81fi8&t=19s [4] https://fred.stlouisfed.org/series/T5YIFR [5] Note that during December 2018, the Federal Open Market Committee was still in a tightening interest rate cycle meaning that inflation expectations was declining from its peak of 2.35% in February 2018. [6] https://www.reuters.com/article/us-global-commodities-kemp-idUSKBN29X28O

The budget, which was handed down by Treasurer Josh Frydenberg MP on 6 October 2020 as part of the Morrison Government’s ongoing economic response to the COVID-19 pandemic, delivered the largest annual nominal budget deficit in Australian history and the largest annual budget deficit as a proportion of Gross Domestic Product (GDP) since the end of World War 2 (WWII).

The budget is a financial calamity for Australia because it blows a gaping black hole in the finances of the Australian Government as far as the eye can see with no prospect of a budget surplus being delivered and, by consequence, the repayment of either the government’s existing debt or the debt accumulated during the COVID-19 pandemic.

To add insult to injury, a cadre of professional economists and vested interested stakeholders (as outlined in the article ‘Democracy will destroy the Australian Dollar via runaway inflation’[1]) formed a pro-stimulus consensus during the COVID-19 pandemic to not only encourage the scale of the budget deficit announced by the Morrison Government, but also in some cases to argue additional economic stimulus which would further enlarge the budget deficit.

While attempting to mitigate the impact of COVID-19 and the resulting economic lockdown as well as save Australia’s household debt bubble from collapse, the pro-stimulus cadre have attempted to argue that continuous budget deficits and accumulating government debt is not an insurmountable challenge to Australia because of our collective heroic economic efforts in the aftermath of WWII.

In the 2.5 decades after WWII (i.e. 1945 to 1970), Australia’s federal gross government debt as a proportion of nominal GDP dramatically shrank despite persistently small budget deficits, through significantly growing:

• Australia’s population;

• the Australian economy; and

• Australia’s money supply (i.e. inflation).

On closer examination of this period, statistical evidence emerges which demonstrates that Australia in the coming one to two decades from FY19-20 onwards will not be able to replicate what Australia previously achieved in the post-WWII period.

When examining the federal budget closely, it quickly dawns on any observer that the scale of the fiscal challenge to not only stabilise government debt but to reduce it requires drastic austerity including significant cuts to federal government expenditure, especially in social welfare, health and education, if runaway inflation or even hyperinflation is to be avoided.

International empirical evidence has emerged that such austerity will result in a catastrophic quantum of premature deaths potentially amounting to hundreds of thousands of Australians.

The $AUD 1.1 Trillion COVID-19 Mistake

As noted in previous columns[2], the actual public health risk posed by COVID-19 was not commensurate with initial forecasts of the number of people globally who may have potentially died from COVID-19[3].

Only in the past week has the World Health Organisation (WHO) suggested that up to 10% of the world’s population or approximately 780 million people may have already been infected with COVID‑19 meaning that the Infection Fatality Rate is 24 times lower than suggested in March 2020, making COVID-19 statistically insignificant from influenza[4].

Moreover, the WHO has warned against government imposing national or regional lockdown restrictions in a primary control response to COVID-19 given that the economic, social and health costs associated with lockdowns outweigh any benefits achieved in containing the spread of COVID‑19[5].

On both of these counts, there appears to be no legitimate public policy justification for the COVID‑19 lockdown restrictions or the subsequent fiscal and monetary economic stimulus.

According to Table 1[6], an underlying cash balance deficit of $85.3 billion was achieved in FY19-20 in response to the closing of Australia’s international border and the initial internal lockdown policies which commenced in February 2020.

Moving forward, deficits of $AUD 480.5 billion are expected to be incurred from FY20-21 through to FY23-24 (i.e. the forward estimates). In total, the deficits over five financial years which are expected to be incurred as a result of Australia’s reaction to COVID-19 is expected to reach $AUD 565 billion.

However, as can be seen by Table 1, a sizeable deficit of $AUD 66.9 billion (or 3% of GDP) is expected to be incurred in FY23-24, with no hope the budget returning to a balanced budget meaning that further deficits are expected to be incurred throughout the decade. Indeed, by FY 2030-31, the federal budget assumes that the deficit would reduce in size to 1.6% of GDP or $AUD 52.8 billion.

Moreover, with these persistent budget deficits, the budget assumes that by June 2031 gross government debt is expected to reach approximately 55.1% of nominal GDP or approximately $AUD 1.8 trillion whereas net government debt is expected to reach 39.6% of nominal GDP or $AUD 1.3 trillion, assuming that nominal GDP reaches $AUD 3.3 trillion in FY2030-31.

Compared to the actual gross government debt position recorded as of 30 June 2020 (i.e. the end of FY19-20), the response to COVID-19 is expected to cost the government more than $AUD 1.1 trillion noting that it is unclear as to which financial year will the first federal government budget surplus be delivered meaning that the gross government debt to nominal GDP ratio will rise beyond the 55.1% figure estimated for FY30-31.

Optimistic Economic Assumptions

While the long‑term cost of COVID-19 to the Australian Government is expected to be in excess of $AUD 1.1 trillion over the coming decade and beyond, it is important to note that the costs indeed may be in fact more.

Embedded in the Federal Budget are a range of economic assumptions which on the surface appear to be optimistic which if they don’t materialise will result in:

• lower rates of economic growth;

• smaller collections of tax revenue;

• larger budget deficits; and

• greater government debt.

In particular, the budget’s more optimistic projections assume that:

• a COVID-19 vaccine is readily available to be rolled out en masse by 1 July 2021;

• private final demand will turnaround by 10% from a contraction of -3.5% in FY20-21 to growth of 6.5% in FY21-22;

• Australian real GDP will turnaround by 6.25% from a contraction of -1.5% in FY20-21 to growth of 4.5% in FY21-22;

• the global economy will experience a sharp recovery in calendar year 2021; and

• there will be no other economic recession (i.e. periods of negative economic growth) during the coming decade.

Given the highly uncertain environment caused by the COVID-19 pandemic and the pre-existing structural problems in both the Australian and global economies, it is perhaps safer to assume that the scale of the damage to the finances to the Australian Government is worse than as presented in the FY 20-21 budget.

Australian History Will Not Repeat Itself

In both the run-up to the federal budget as well as after its release, multiple Australian economist and journalists[7] have suggested that the projected deficits and government debt do not pose an existential threat to the Australian Government given that larger deficits and debts relative to GDP have been overcome in the past[8].

As can be shown in Diagrams 1 and 2, the period during WWII saw war-related expenditure skyrocket resulting in the Australian Government’s annual deficit ballooning out in excess of 25% of nominal GDP and gross government debt ballooning out to approximately 120% of nominal GDP.

In the 25 years after WWII (i.e. 1945 to 1970), both the annual deficit and gross government debt as a proportion of nominal GDP shrank dramatically. Gross federal government debt shrank to approximately 8% of nominal GDP by FY1973-74[9] and net federal government shrank to 0.9% in FY1970-71[10].

The shrinkage in the Australian Federal gross government debt to nominal GDP ratio was despite a series of budget deficits being delivered during in the 1950s and 1960s by both the Chifley and Menzies’ Governments.

Diagram 1: Australian Federal Budget Deficit as a proportion of Nominal GDP

Diagram 2: Australian Federal Gross Government Debt as a proportion of Nominal GDP

To understand how this significant economic feat was achieved, a closer examination of the:

• size and demographic profile of Australia’s population;

• Australian economy; and

• structural and discretionary dynamics of the Federal Budget

is required.

Once these factors are closely considered, it becomes evident that:

• the post-WWII period and the coming one to two decades differ by a significant degree given a range of structural differences; and

• the scale of the changes that Australia must undertake in the coming one to two decades in order to reflect what occurred post-WWII are drastic and unlikely.

Table 2 highlights nine core factors which reflects:

• how gross government debt relative to nominal GDP was able to shrink post-WWII from 120% in FY45-46 to 8% in FY73-74; and

• why these factors either are unlikely to apply in the coming 1 to 2 decades following the FY19-20.

Table 2: Core Factors for Post-WWII Shrinkage of Gross Government Debt to Nominal GDP and Implications For Australia in 2020 and Beyond

What can be seen by Table 2 is that the post-WWII period was a remarkable period in Australian history and Australia’s ability to reduce gross government debt as a proportion of GDP was driven by a range of unique factors which are unlikely to be replicated in the coming one to two decades from FY19-20 and beyond.

The implications of this critical finding are that:

• the structural financial hole which the Australian Government finds itself in is larger than what economists and commentators have suggested in the past 4 weeks;

• the scale of the fiscal challenge to balance the budget and to reduce the quantum of Commonwealth debt is immense and cannot be overcome via economic measures or population growth; and

• structural budget austerity will be required to achieve a sizeable budget surplus sufficient to reduce the gross government debt to nominal GDP burden; and

• if sufficient structural budget austerity is not achieved then Australia is likely to experience a currency and balance of payments crisis on a more extreme scale than what former Federal Treasurer Paul Keating experienced during the 1985-86 ‘banana republic’ balance of payment crisis.

This is because of the scale of Australia’s foreign debt (to which public sector debt is and will be into the future a major component) can lead to a blow out in the current account deficit either through a sharp depreciation in the Australian dollar or though rising global interest rates.

These implications carry significant economic and financial consequences into the future for both Australia as a nation and for individual Australian citizens. As these implications are poorly understood, individual Australians, if left unprepared, may experience adverse economic and social outcomes when the moment of crisis arrives.

The Scale of Australia’s Federal Fiscal Challenge

Any attempt to balance Australia’s Federal Budget and to repay the scale of ever accumulating federal debt will require a significant multi-year fiscal austerity package that delivers consecutive sizeable budget surpluses.

As noted in the article, Democracy will destroy the Australian Dollar via runaway inflation’, given Australia’s pro-economic stimulus political consensus and the nature of Australia’s democratic political system, the need for such fiscal austerity is likely to be borne from an economic crisis driven by concerns of Australia’s international creditors rather than by an organic internal political movement and corresponding agenda.

As outlined by Alesina, Favero and Giavazzi (2019)[24], other developed countries across Europe and North America have been forced to implement fiscal austerity packages due to concerns from bond holders as to the solvency and creditworthiness of their governments.

These austerity packages have either included:

• rising taxes or other government charges;

• reducing expenditure;

• privatising government assets; or

• a combination of all three.

Interestingly, the analysis by Alesina, Favero and Giavazzi demonstrates that fiscal austerity attempted through raising taxes does little to reduce budget deficits, given that raising taxes results in:

• greater economic uncertainty and lower business confidence;

• lower levels of investment;

• larger losses of economic output; and

• lower tax revenue growth over the medium term.

Alternatively, fiscal austerity implemented by cutting government spending does not adversely impact business confidence or investment and thus leads to a minimal loss of economic output over the medium term. As a result, fiscal austerity via a sustained multi-year program of cutting government spending leads to a sustained reduction in the size of the budget deficit.

The only downside of a fiscal austerity package driven by reducing government expenditure is that the financial, and as a result the political, impact is felt immediately whereas the economic impact of tax increases are felt with greater effect in later years.

Thus, any attempt to deliver a federal budget surplus and repay Commonwealth debt will require a disproportionate quantum of cuts to federal government spending as opposed to raising federal taxes.

When examining the future estimates of federal government spending through to FY2023-24 (see Table 3 below), we can see that a substantial amount of additional economic stimulus spending dominates the current financial year (i.e. FY2020-21) which is shown in:

• “other economic affairs” (this line item is expenditure dominated by the JobKeeper program); and

• “social security and welfare” (which includes the JobSeeker payment).

However, beyond this financial year, federal government expenditure is dominated by pre-COVID-19 recurring government spending. As noted in Table 2 above, this spending is dominated by social security welfare, health and education which comprises more than 58% of budget expenditure over financial years F21-22, FY22-23 and FY23-24 whereas defence spending only makes up approximately 6.3% over the same period.

As noted in Table 1 above, the federal deficit is assumed to remain large over the coming three financial years and will remain persistently above at least $AUD 50 billion per annum through to FY 30-31. As noted above, circumstances can easily arise (e.g. a prolonged COVID-19 pandemic, weak economic growth or rising interest rates) which result in a larger budget deficit well above what has been estimated.

Thus, the scale of the austerity spending cuts required to produce a budget surplus remains well in excess of $AUD 50 billion per annum which are not easily achievable without significant spending cuts to social security, health and education.

During an economic crisis where the budget deficit has blown out above estimate, the scale of austerity spending cuts could be well above $AUD 100 billion per annum.

Given that particular State and Territory Governments are also carrying a significant debt burden, in particular Victoria, Queensland, Western Australia and the Australian Capital Territory, it is likely austerity at this level of government may also be required during an economic crisis which would:

• detract from economic growth as measured by GDP;

• exacerbate the federal deficit; and

• require even larger cuts to federal government expenditure.

The Social Cost of Austerity

Such significant cuts to sensitive portfolios will carry significant and long-run implications.

Indeed, in the post 2008 Global Financial Crisis era an increasing amount of academic research has been conducted on the effects of the fiscal austerity which has been implemented by various governments including the United Kingdom (UK) and in the European Union.

According to one European academic paper (Stuckler and co)[25], any major cuts to government spending, especially in the areas of social security welfare and health are likely to result in two main effects:

• the ‘social risk effect’ – which refers to the social consequences from austerity which includes greater unemployment, crime, poverty, suicide, homelessness, poor diets which can culminate into an increase in infectious diseases, physical harm, multiple morbidities, premature mortality;

• the ‘health care effect’ - which refers to citizens being restricted access to health care either through cuts to health care services or reductions in health services.

These effects combined translate to a significant number of premature deaths as measured by the mortality rate, especially in countries with an older demographic profile. As noted by Stuckler and Co (see footnote 23), Italy recorded its highest mortality rate since WWII in 2015 and the UK saw its highest mortality rate in 50 years also in 2015.

One 2017 UK study suggested that the austerity implemented by the Tory Government of David Cameron led to approximately 45,000 premature deaths per year or up to 130,000 people[26]. The authors of the paper described the impact of austerity as ‘economic murder’[27].

When fiscal austerity is required to be imposed in Australia, similar effects can be expected which, given:

• Australia’s demographic profile; and

• the concentration of federal government spending in social security and welfare and health

are likely to result in the premature deaths of tens of thousands, if not hundreds of thousands, of Australians. The death of these individuals will be the real tragedy of the Morrison Government’s FY20-21 Federal Budget – a death toll far greater than the risk posed by COVID‑19.

Conclusion

Australia’s existing national economic problems have been compounded by the worst federal budget in Australian history.

The budget delivered the largest annual fiscal deficit in Australian history in nominal terms and the largest budget deficit in real terms since World War 2. In its totality, the reaction of the Federal and State/Territory Governments are projected to rack up over $AUD 1.1 trillion from FY19-20 through to FY2030-31 in response to COVID-19.

As a result, gross and net Federal Government debt is expected to balloon out by 2030 to $AUD 1.8 trillion (or 55.1%) or $AUD 1.3 trillion (39.6%) respectively.

As noted in other articles, the public health risk posed by COVID-19 did not justify this level of expenditure and the quantum of fiscal and monetary stimulus was in reality designed to rescue Australia’s largest household debt bubble and Australia’s commercial banks by minimising unemployment and the scale of household and business defaults.

While the economic stimulus package delayed a day of reckoning among a large number of Australian households who possess:

• over inflated assets;

• significant debts; and

• little savings

the underlying structural problems facing Australian households and the broader economy have not been solved and in fact have only been exacerbated.

Unlike in the post-WWII period where Australia was able to dramatically grow its population and economy which resulted in gross government debt to GDP to dramatically shrink over 25 years through to 1970, a range of factors demonstrate that such a repeat performance in the coming 25 years is not possible.

In order to prevent a balance of payments and currency crisis which will ultimately result in runaway inflation, fiscal austerity is required at both the federal government as well as the state and territory government levels.

As demonstrated by academic research from the UK and Europe, fiscal austerity will result in significant adverse social and health outcomes, in particular an increase in the mortality rate and premature death.

Given that Australia has an ageing population and that federal government spending is concentrated in social security and welfare, health and education, fiscal austerity in Australia, especially if conducted during an economic crisis, will require significant cuts that will result in a reduction of disposable income to Australia’s poor, disabled and elderly as well as a restriction of access to health services.

Based on international experience, this should result in a sharp increase in Australia’s mortality rate resulting in the premature deaths of tens of thousands if not hundreds of thousands of Australians.

The tragedy of 2020 is that while Australia’s political class moved heaven and earth to prevent the death of older Australians who were at risk from COVID-19, its irresponsible and disproportionate actions will result in a far higher death toll, especially of older Australians, in the years to come.

John Adams is the Chief Economist for As Good As Gold Australia

[1] https://www.adamseconomics.com/post/democracy-will-destroy-the-australian-dollar-via-runaway-inflation [2] See the following article from April 2020: https://www.adamseconomics.com/post/australia-has-been-economically-destroyed-within-4-weeks [3] For example, Imperial College suggested that up to 40 million people globally were at risk of death and the Doherty Institute estimates that up to 150,000 Australians were at risk of death if no mitigation strategies were implemented. [4] https://www.en24news.com/2020/10/covid-19-780-million-people-infected-against-35-million-officially-the-who-is-self-critical.html [5] See https://www.telegraph.co.uk/global-health/science-and-disease/exclusive-top-disease-detective-warns-against-return-national/ and https://nypost.com/2020/10/11/who-warns-against-covid-19-lockdowns-due-to-economic-damage/

[6] Table 1 is sourced from the FY20-21 Federal Budget, Budget Paper 1, Statement 3, page 3-6 [7] Examples include ABC economics writer Gareth Hutchens, EY Chief Economist Jo Masters and Castlemaine Institute Warwick Smith. [8] See the following: https://www.michaelwest.com.au/history-shows-future-generations-dont-need-to-suffer-from-government-debt/ or https://www.abc.net.au/news/2020-10-09/federal-budget-2020-debt-deficit-blowout-explained/12741472 [9] https://www.ey.com/en_au/covid-19/oceania-covid-19-response/is-australias-debt-level-unprecedented [10] See FY2020-21 Federal Budget Paper - Statement 10, page 11-12. [11] See the following ABS publication: https://www.abs.gov.au/ausstats/abs@.nsf/2f762f95845417aeca25706c00834efa/e2f62e625b7855bfca2570ec0073cdf6!OpenDocument [12] https://archive.budget.gov.au/1945-46/Budget_1945-46.pdf [13] https://treasury.gov.au/publication/2015-igr [14] Another important point to note is that the 2015 Intergenerational Report forecasted that Australia’s population was expected to reach 28 million people by 2025, which now is unlikely. [15] See ABS publication: “Australian Historical Population Statistics – 3105.0.65.001, 2016” - https://www.abs.gov.au/AUSSTATS/abs@.nsf/second+level+view?ReadForm&prodno=3105.0.65.001&viewtitle=Australian%20Historical%20Population%20Statistics~2016~Latest~18/04/2019&&tabname=Past%20Future%20Issues&prodno=3105.0.65.001&issue=2016&num=&view=& [16] https://www.abs.gov.au/ausstats/abs@.nsf/0/1CD2B1952AFC5E7ACA257298000F2E76?OpenDocument [17] See “Australian Economics Statistics 1949-50 to 1996-97, Occasional Paper No. 8, Table 5.1a: Expenditure on Gross Domestic Product at Current Prices” - https://www.rba.gov.au/statistics/frequency/occ-paper-8.html [18] See the ABS’ “Australia’s National Accounts” publication - https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-expenditure-and-product/latest-release [19] See Graph 5 for the following speech by RBA Deputy Governor Ric Battelino - https://www.rba.gov.au/speeches/2007/sp-dg-250907.html [20] This data was calculated using household debt data from the RBA and nominal GDP data from the ABS. [21] https://www.abc.net.au/news/2020-10-11/federal-budget-why-frydenberg-wont-be-pursuing-full-employment/12751566 [22] See Federal Budget Paper 1 – Statement 2: Economic Outlook – Page 2-5 [23] See Table 1 from the 1992 publication by the Department of the Parliamentary Library: https://www.aph.gov.au/binaries/library/pubs/bp/1992/92bp26.pdf [24] Alesina, A., Favero, C., and Giavazzi, F., (2019), “Austerity – When It Works and When It Doesn’t”, Princeton University Press, New Jersey, USA [25] Stuckler, D.; Reeves, A.; Loopstra, R.; Karanikolos, M.; Mckee, M., (2017), “Austerity & health: the impact in the UK and Europe”, European Journal of Public Health, Vol. 27, Supplement 4. [26] https://www.theguardian.com/politics/2019/jun/01/perfect-storm-austerity-behind-130000-deaths-uk-ippr-report [27] https://politicsandinsights.org/2017/11/16/austerity-is-economic-murder-and-bad-economics-says-cambridge-researcher/

Among economists, the debate continues to rage as to the macroeconomic ramifications of the pandemic, particularly against the backdrop of the largest global debt bubble in human history as well as structural deficiencies in global financial markets which were observable, particular in the US repo market, in the pre-COVID-19 era.

One of the most contested debates is whether the global economy is currently experiencing, or will in the near future experience, either deflation or inflation.

Deflation Camp vs Inflation Camp

In one camp, some economists argue that the loss of economic activity and income will result in a mass wave of defaults as governments, businesses and households will struggle to service their cashflow obligations, in particular their debts.

These defaults will then reach critical mass thus triggering solvency problems within financial institutions (e.g. banks, hedge funds, exchange traded funds, etc) causing a declaration of bankruptcy which will ultimately result in the collapse of multiple Globally Systemically Important Banks (G-SIBs) thus leading to a complete meltdown of the global financial system – similar to the 2008 Global Financial Crisis (GFC).

Such a meltdown, if left unmitigated, would lead to the largest depression in world economic history, leading to:

• a sizeable and permanent reduction in global debt (including the total outstanding number of bonds); and

• a collapse of prices economy-wide (especially asset and commodity prices);

• a shrinkage of the number of businesses that continue to operate; and

• mass unemployment.

In the other camp, some economists argue that the unprecedented monetary and fiscal economic stimulus unleashed by governments and central banks will prevent mass defaults and the collapse of the global debt bubble and instead trigger an inflationary spiral that will erode the value of government issued fiat currencies such as the Australian dollar (especially measured against traditional forms of money such as physical gold and silver).

Such a process will be triggered through the issuance of more debt via the banking system and capital markets which will be injected into asset values (property, shares, etc) and commodity markets (such as oil, food, energy and metals) which in turn will spread across the economy and find its way into consumer goods and services.

This inflationary spiral will intensify when owners of government and corporate bonds abandon this asset class due to both negative nominal and real bond yields leading to a transfer of financial capital to the real economy (i.e. financial capital from the bond market will rollover to either commodities or real goods and services).

Under this situation, global stagflation or even hyperinflation will ensue leading to a repeat of the 1970s or in some extreme cases Weimar Germany, Zimbabwe, Argentina or even modern-day Venezuela. Under such conditions, wealth wrapped up in financial assets such as cash and fixed income products such as government or corporate bonds or annuities will evaporate and the nominal value of real assets (as expressed in the government issued currency) will skyrocket.

For those individuals who are not positioned appropriately, runaway inflation can lead to an erosion of wealth and living standards as the ability to purchase essential necessities such as food, energy, accommodation and transport become more difficult to afford.

While economists are known for having dry theoretical debates, this particular debate is not academic.

The outcome of this debate will radically alter the power and influence of various vested international and domestic political and financial interests and will dramatically impact the living standards and financial standing of billions of people globally.

Deflation vs Inflation in Australia

In Australia, the debate of whether the Australian economy will experience deflation vs inflation in the coming 12 to 36 months has significant relevance given the nature and size of Australia’s household and foreign debt bubbles.

Debt bubbles that are formed and concentrated within the household sector (typically driven by rapid accumulation of household debt via mortgages resulting in speculative real estate and land bubbles) have more widespread economic and political ramifications given that more households are directly impacted both financially, legally and emotionally relative to debt bubbles formed in either via corporate or government balance sheets.

Moreover, given that household debt in Australia is in excess of 120% of GDP (a record high in Australian economic history), this means that the scale of the economic damage which would eventuate if the debt bubble were to collapse (i.e. deflation) would be far more significant relative to smaller debt bubbles. On the other hand, given the scale of the debt bubble, the amount of economic stimulus required to keep it intact is unprecedented in both nominal and relative terms.

While the performance of the global economy and international economic policy, e.g. globally coordinated central bank policy action or the national level economics policies, could have a profound impact on whether Australia experiences deflation or inflation, domestic policies from the Federal and the State/Territory Governments as well as key economic institutions such as the RBA and APRA are also very important to determining the future direction of the Australian economy.

In the absence of a new shock to the global economy (e.g. a declared insolvency from a G-SIB), one could argue that domestic economic policy in Australia could significantly influence the deflation/inflation question more so than international factors.

In the era of COVID-19, domestic Australian policy makers (which includes the National Cabinet consisting of the Commonwealth and the State/Territory Governments) have unleashed unprecedented levels of monetary and fiscal economic stimulus in Australian history to not only to soften the blow of the COVID-19 economic lockdown, but to also save the domestic household debt bubble by limiting the scale of the household debt defaults. This includes delivering the largest projected nominal federal budget deficit in FY 2020 – 21 since world war 2[1] (relative to real GDP) as revealed by Treasurer Josh Frydenberg on 6 October 2020[2][3].

It is for these reasons that evidence is building that the Australian economy is already experiencing stagflation given:

• negative economic growth;

• elevated unemployment that is forecasted to rapidly grow higher from October 2020 to the end of the 2020 calendar year; and

• rapid growth of Australia’s money supply as measured by ‘broad money’ which on an annualised basis is growing at 11.5% as of August 2020 which is the fastest rate since June 2009.

As Australia enters the fourth quarter of 2020 and the quantum of economic stimulus materially reduces with the scale back of income support programs Job Keeper and Job Seeker, a significant cashflow crunch is looming for many Australian businesses and households that will materially affect whether debt obligations can be adequately serviced[4].

If household cashflow obligations cannot be serviced and debt defaults start to escalate coupled with significant business foreclosures, then economic contagion will start to, without additional policy action, flow through the Australian economy resulting in a deflationary spiral resulting from a shrinkage of domestic debt and a deeper economic recession.

Politics will dictate Economic Strategy

Given the material political ramifications that the largest household and foreign debt bubbles in Australian history poses to the political class, it is little wonder that that short-term domestic political interests are influencing the formulation and delivery of domestic economic policy.

Anecdotal evidence from conversations with Federal parliamentarians indicate that, for example, the Morrison Government’s policy formulation process is being driven in the context of maximising the Government’s re-election chances in the expected 2021 Federal Election.

So, to accurately forecast future economic policy decisions which will have a strong bearing on whether Australian economy experiences inflation or deflation, objective political analysis is required.

Moreover, beyond the direct political interests of Federal Parliament, a set of political and financial interests will also influence as to whether Australia experiences inflation or deflation and this includes industries such as banks and financial services, construction, retail, tourism as well as organisations such as trade unions and social service organisations.

The Political Consensus is for More Economic Stimulus

Given the importance of political analysis in forecasting future domestic economic policy, it is material to note that a broad political consensus was reached during the early stages of the current COVID-19 pandemic to implement the unprecedented economic stimulus for a six-month window from March 2020 to September 2020.

Many of the same stakeholders including influential thinktanks, economic consultancy organisations and political and economics commentators have all called for evermore stimulus, with little regard for the medium to long term economic consequences that economic stimulus entails.

Dangerously, such universal consensus regarding economic stimulus also existed in Weimar Germany in the aftermath of world war 1 and in the lead up to the Hyperinflation of 1923[5].

Moreover, and importantly, the political consensus calling for more economic stimulus is both contextual (i.e. the COVID-19 pandemic) as well as a structural given Australia’s democratic political system. Critics of democracy of the 18th and 19th century in both the United Kingdom and the United States argued that democracy with a wide universal mandate would sacrifice the public interest for short-term delivering disastrous long‑term economic and public policy outcomes.

One such example is Alexander Tytler who wrote in 1854[6]:

“A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.”

Alternatively, American Founding Father James Madison, writing in Federalist Paper 10[7] said:

“When a majority is included in a faction, the form of popular government, on the other hand, enables it to sacrifice to its ruling passion or interest both the public good and the rights of other citizens.”

While all political parties in Australia for both contextual and structural reasons are advocates for more economic stimulus, political differences are beginning to emerge as to the form that ongoing stimulus should take.

In recent weeks, various political organisations have sought to politicise attempts to wind-up particular forms of economic stimulus, for example income support (i.e. JobKeeper and JobSeeker) given:

• the ongoing lockdown;

• an expected increase in unemployment in the coming months; and

• the immediate financial cashflow concerns facing various Australian businesses and households.

Despite the economic stimulus announcements in the Federal Budget released on 6 October 2020 which centred around:

• tax cuts;

• wage subsidies (i.e. Job Maker);

• infrastructure spending; and

• incentives to spur business investment and the take up of commercial credit

• the winding-up of income support measures, the exhaustion of savings (especially of those savings which came from the drawdown of superannuation accounts) and the ultimate ending of businesses trading while insolvent means that the financial pressure facing households and businesses will continue to intensify in the coming months.

Thus, it is understandable that Leader of the Opposition the Hon. Anthony Albanese MP announced further spending commitments in his 8 October 2020 budget-in-reply which would ease the cashflow pressure on middle class households (especially around childcare).

The Inflationists are the Dominant Political Faction

Given the discussion above, it is clear that the ‘inflationists’, those advocating for ever more economic stimulus, are the dominant political faction in Australia.

Their wide reach throughout government, the bureaucracy, the media, business groups, thinktanks, academia, industry and trade unions mean that public debate on economic policy will be skewed and that the Australian people will not hear legitimate criticisms or the alternative case to the pro‑economic stimulus agenda.

The most dangerous consequence of the ‘inflationists’ political dominance is that the medium to long term consequences of their economic policies is not being properly explained to the Australian people and thus, given Australia’s democratic system, there is little prospect of economic policy moving in an alternative direction.

As a result, it would appear from the current vantage point that Australia is on track to have a rendezvous with crisis and catastrophe.

Can Australian Democracy Save Itself?

From an objective standpoint, evermore economic stimulus and inflationism does not resolve the core structural economic imbalances which are currently present in the Australian economy and which have built up over the past 30 years since the 1991 recession.

As Weimar Germany or even Argentina have demonstrated, the inflationist stimulus path delays any resolution of underlying issues and only compounds a country’s economic problems ultimately leading to a catastrophic currency crisis and hyperinflation.

For Australia to avoid these horrors, a reset of the economy to a more solid and sustainable foundation is required.

To achieve this, Australia needs to implement a macroeconomic austerity program that facilitates sustained deflation by shrinking Australia's enormous household debt and rapidly growing public sector debt as well as ensuring a firm stable foundation for the Australian dollar. This includes:

• the RBA ceasing its bond buying program and generous bank financing arrangements as well as raising official interest rates;

• Federal and State/Territory Governments implementing severe government spending cuts which facilitate budget surpluses that allows for public sector debt to be repaid and for the overall tax burden on productive sectors of the economy to reduce[8];

• a restructuring of Australia’s banking system that ends the too big to fail dilemma and directs credit towards productive investment rather than asset speculation; and

• the implementation of microeconomic reform in areas such as taxation, labour, energy and public administration which reduces business costs and lifts multifactor productivity and international competitiveness.

Admittedly, the impact of a deflationist macroeconomic austerity agenda will have disproportionate impacts on those Australians who:

• have significant debts and little savings;

• have significant reliance on government expenditure; and

• are employed in sectors which are closely tied to the current household debt bubble or the public sector.

These Australians represent a significant proportion of the overall population.

Given this reality and the political ramifications that this carries, no political will exists:

• within Federal or State/Territory parliaments; or

• even domestic Australian political parties that do not hold public office to advocate for a macroeconomic austerity agenda that comes to terms with Australia’s national economic problems.

The more central question facing Australian democracy is that even if such political will were to exist and was willing to put forward such an agenda, would a majority of Australians be willing to support the harsh realities that such an agenda was to impose?

That is, does Australian democracy have the capacity to save the Australian dollar from an inevitable currency crisis?

Anecdotal conversation with existing Federal Parliamentarians, political academics and seasoned political journalists suggests no, even though historical precedents do exist where democratic mandates for an economic austerity program was secured. Examples include:

• the United States in 1920 with the election of Warren Harding[9],

• Australia in 1931 with the election of Joseph Lyons[10]; and

• the United Kingdom in 1979 with the election of Margaret Thatcher[11].

Rather, Australia’s political class, especially incumbent parliamentarians within the Morrison Government, fear an electoral wipe out if a deflationist austerity agenda were to be suggested to the Australian people or implemented as previously observed in countries such as:

• Germany at the 1930 and 1932 general elections;

• Ireland at the 2011 general election; and

• Greece at the 2012 general election.

Importantly, in the three case studies noted above where a pro-austerity democratic mandate was established, the winner of these elections was the opposition political party to the government of the day, whereas, in the three case studies where electoral wipe outs was experienced, these governments were the incumbents.

Recent academic scholarship by Princeton University Professor Christopher Achen and Vanderbilt University Professor Larry Bartels[12] have provided robust statistical analysis as to the basis of how voters cast their ballots in democratic elections.

When it comes to the economic considerations, Achen and Bartels assert that voters are most sensitive to income growth in the two quarters prior to an election – that is voters are retrospectively myopic and tend to discard economic conditions in the years prior.

Given this empirical finding, there is little incentive for the current Morrison Government to implement corrective macroeconomic policy given that voters are likely to punish them for a decline in household disposable income that would result from a deflationary austerity program.

Moreover, given Australia’s record household debt, there is little incentive for typically aspirational Australians (typically referred to as the Howard Battlers during the early 2000s), who have been lured into taking on record sums of debt to finance property speculation and extravagant lifestyles to vote for a policy agenda which would severely cripple their own personal financial circumstances.

The only likely opportunity for a democratic mandate for such an agenda to be secured would be an opposition party (i.e. most likely the alternative government within the Federal Parliament) who would put forward such an agenda when the adverse consequences of the inflationist agenda is felt by a wide spectrum of Australian society, i.e. when a full-blown balance of payments and currency crisis is underway.

Conclusion

The Australian economy is at a critical juncture.

With the biggest debt bubble in Australian history, a collapse of this debt through a critical mass of mortgage defaults would lead to the largest economic depression ever experienced by the Australian people.

Alternatively, the issuance of ever-increasing amounts of fiscal and monetary economic stimulus will erode and ultimately destroy the value of the Australian dollar through runaway inflation and ultimately a balance of payments and currency crisis, especially given the scale of Australia’s gross and net foreign debt.

If history is any guide, a country’s economic management via a democratic political system in which its citizens have a dependence on government is going to result in:

• economic policy being set by short-term political interests; and

• runaway inflation driven by ever-increasing demands on government that results in large fiscal deficits and ballooning public sector debt.

Currently, Australia possesses a political consensus which is advocating for more economic fiscal and monetary stimulus. This consensus has led the Morrison Government to deliver the largest nominal federal budget deficit on record and the largest relative to GDP since WWII.

Political and legal philosophers such as James Madison and Alexander Tytler warned in the 18th and 19th Centuries respectively that the inherent nature of political systems carry direct economic consequences. In this Tytler warned that democracy carries inherent design problems that will result in intractable economic ruin.

Importantly, this has not always held true. Democratic systems have shown capacity historically to elect non-incumbent reformist governments who implemented macroeconomic austerity agendas, although generally these occurred during deteriorating economic conditions and crisis.

In the current context, the Howard Battlers, i.e. the aspirational class of Australians who bought into a fantasy lifestyle unattainable to their forbears through extraordinary personal debts, must bring themselves to financially blowing themselves up in order to rescue Australia from long term economic ruin.

Given the academic findings of Professors Achen and Bartels, this does not seem likely in the short term.

Upon the way towards runaway inflation and an ultimate currency crisis, Australian democracy in 2020 which is coupled with the universal franchise remains the main impediment to implementing sound macroeconomic policy.

The Australian dollar will be the ultimate victim.

John Adams is the Chief Economist for As Good As Gold Australia

[1] https://www.smh.com.au/politics/federal/frydenberg-unveils-biggest-deficit-since-world-war-ii-20200722-p55ejf.html [2] In nominal terms, the projected budget deficit for FY20-21 is the largest in Australian history standing at $AUD 213.7 billion. [3] This also includes delivering projected large budget deficits over the forward estimates through to FY 23‑24. [4] A good outline of the looming situation was documented by the Australian Broadcasting Corporation’s 4 Corners program on 28 September 2020. [5] Weitz, E., (2007), “Weimar Germany – Promise and Tragedy”, Princeton University Press, Princeton, New Jeresy, USA (Chapter 4) [6] Tytler, A., (1854), “Universal History – From the Creation of the World to the Beginning of the 18th Century”, Petridge and Company, Boston, USA [7] https://billofrightsinstitute.org/founding-documents/primary-source-documents/the-federalist-papers/federalist-papers-no-10/ [8] Recent economic research examining fiscal austerity demonstrate that austerity based on cutting government expenditure results is little to no loss of economic outcome over the medium term and a sustained decrease in public sector debt whereas fiscal austerity based on raising taxes will result in a severe loss of economic output given that rising taxes has a distortive impact on business investment. An example of this analysis can be found via Alesina, Favero and Giaavazzi (2019), “Austerity – When it Works and When it Doesn’t”, Princeton University Press [9] See Grant, J., (2014), “The Forgotten Depression – 1921: The Crash That Cured Itself”, Simon & Schuster, New York, USA [10] See Henderson, A., (2011), “Joseph Lyons – The People’s Prime Minister”, NewSouth Publishing, Sydney, NSW, Australia [11] An analysis of the 1979 General Election offered by Professor Venon Bogdanor can be found at the following link: https://www.youtube.com/watch?v=UKWm51sTtEI&t=833s [12] Achen, C., and Bartels, L., (2017), “Democracy for Realists – Why Elections Do Not Produce Responsive Government”, Princeton University Press, USA